Trump’s Tax on Champagne Will Cost U.S. Consumers

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As Sino-American trade relations have improved in recent weeks, President Trump has turned up the heat on his European allies. But it is U.S. businesses and consumers that could end up burned.

The White House is in the final stages of deciding if it will slap 100% tariffs on $2.4 billion’s worth of French wine and luxury goods. The European Union has said it stands with France and “will respond” if the U.S. follows through. Europe’s trade commissioner Phil Hogan and U.S. Trade Rep. Robert Lighthizer will discuss the topic this week in Washington.

The tariff threats are the White House’s answer to a French tax of 3% on the digital service revenues of giants like Apple, AAPL 2.14% Facebook FB 1.77% and Google. They are also a pre-emptive strike intended to dissuade other nations from setting up their own digital service taxes—Italy and Austria have new DSTs and Britain is preparing one. These taxes are responses to a lack of progress in the Organisation for Economic Cooperation and Development project to stop big corporations, particularly in the technology sector, cutting their tax bills by shifting profits around the world.

The OECD efforts to overhaul taxes on digital companies were stalled for years due to a lack of U.S. support. A change of heart in Washington in 2018 opened the way for progress and expectations that the more than 130 countries involved could agree to a deal this year. France said it would get rid of its digital tax and give companies credit for any DST paid once the OECD deal was reached. Then, last month, the U.S. asked for fundamental changes to the OECD reform proposal and threatened to apply the French tariffs.

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U.S. and French treasury officials are now working with OECD representatives to find a compromise before French Finance Minister Bruno Le Maire and U.S. Treasury Secretary Steven Mnuchin meet in Davos next week. The whole mess could unwind if they find a compromise that clears the way for an OECD agreement.

If they don’t, Americans will probably end up footing the bill. Conventional thinking predicts that exporting companies absorb the cost of new tariffs to keep their prices competitive. But a recent paper by the National Bureau of Economic Research found that President Trump’s tariffs on Chinese-supplied products were fully passed on to U.S. companies and consumers in all industries except steel, where half was passed on. Other studies have found similar results.

It should be the same for French producers of champagne, handbags and cosmetics, implying that U.S. prices will go up. Strong brands mean there aren’t many substitutes, and the exclusivity implied by high prices are often part of an item’s appeal.

Some American consumers are likely to wait until their next trip overseas, where the strong dollars can bag a relative bargain. Visitors to the U.S. may also buy elsewhere. This used to be the experience in China, where taxes helped make luxury goods more expensive than abroad and pushed a big chunk of Chinese spending into Europe or tax-free Hong Kong. Tariffs could similarly take luxury spending away from beleaguered American department stores.

Delays in global tax reform used to save companies money—or at least defer the charges—but the new weapons of digital taxes and trade tariffs have upended the battle. The OECD overhaul now offers investors and companies their best hope of a predictable tax bill.

Write to Rochelle Toplensky at [email protected]

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