Five Priorities if Trump’s Trade War Goes Digital

Hannes Berggren, Trade Policy Advisor, National Board of Trade Sweden

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On 2 April, the Trump administration expanded its costly trade war by introducing new discriminatory measures under a scheme it calls “reciprocal tariffs”. These undermine the rules-based multilateral trading system and erode trust that the US has spent decades building with allies and trading partners. There is no logic to how these tariffs have been “calculated”, but the administration has signalled that it would controversially include non-trade instruments such as domestic taxes and regulatory regimes. For example, President Trump has previously threatened to target Brussels in response to fines imposed on US tech companies.

The EU, meanwhile, has been considering retaliation against US digital services by using powers under the enforcement regulation or if necessary the anti-coercion instrument (ACI). The EU also has a number of other tools that it could use to respond to the US, of which several relate to the digital economy, as the European Council on Foreign Relations (ECFR) recently outlined.

Before unleashing retaliatory actions on digital trade – which represents about 25 percent of global trade – the European Commission and EU member states should consider the following:

1. Analyse the role of digital services in value chains

It may be tempting for the EU to target the US digital services surplus – just like the US targets the EU’s goods surplus with tariffs. But just like with tariffs, digital trade restrictions also introduce a varying degree of self-harm and need to be analysed with an evidence-based approach. For example, removing GDPR adequacy status for data transfers to the US harms overall EU digital trade. Moreover, Sweden’s National Board of Trade has found that companies using cloud services tend to have stronger export performance. Since cloud services are often delivered by US companies, EU export performance may thus be hurt if they are targeted.

Therefore, similar to how it chooses tariff lines for retaliation, the EU should take a value chain perspective to any digital trade retaliation. That includes understanding what role different US digital services play for EU companies’ production and how easily they could be replaced. Moreover, just like how EU retaliatory tariffs on bourbon make the trade war’s costs known to red states, retaliation in the digital sphere should also be designed with regard to what role different actors play in the Trump coalition.

2. Do not politicise the enforcement of EU regulation 

While it may be tempting for the EU to weaponise its vast digital policy toolbox against the US, it has much to gain from refraining to do so. The US is rapidly eroding trust that has taken decades to build – the EU should not fall into the same trap. The EU’s reputation and trust as a democratic actor governed by rule of law has a high value, probably increasingly so today. Continuing to apply EU regulation in an objective manner is therefore of the highest importance. That means the European Commission should neither increase enforcement of laws such as the digital markets act (DMA) and digital services act (DSA) in reaction to trade threats, nor should it offer decreased enforcement of these laws as a bargaining chip.

Instead, the EU should utilise its Digital Package foreseen for the end of this year to evaluate what effect its digital regulations have on international trade and competitiveness. Understanding such effects naturally requires listening to views from policymakers and firms from the EU as well as those from our trading partners. It also means conducting independent and evidence-based analysis before formulating proposals for how to improve digital regulation. Utilising that approach, the National Board of Trade recently suggested that the GDPR could be revised to strengthen EU trade and competitiveness while maintaining robust data protection.

3. Attract US tech talent to the EU

The EU needs to strengthen its access to several inputs in order to improve its competitiveness in the age of AI. The National Board of Trade has recently suggested what those inputs are and how trade policy could help improve access to them. One of those outlined inputs is skilled labour. The Trump administration has now provided the EU with an opportunity to narrow the tech skill gap.

Across the United States – not least in states such Washington and California – there is ample supply of tech talent. Attracting some of them to Europe would have no direct cost to the EU. Instead, it would be an efficient way to use the current situation to boost our tech talent pool. EU member states could therefore swiftly introduce coordinated fast-track visa schemes and tax incentives for US tech talent willing to work here.

4. Keep the door open for de-escalation and digital integration with the US

Prior to the US presidential election, the National Board of Trade argued in an analysis that EU-US fragmentation over digital regulation is unnecessary between two normally closely allied partners because it harms economic and security objectives on both sides of the Atlantic. Donald Trump’s trade war on Europe deepens this rift, but in a longer perspective the case for deeper transatlantic digital integration is strong and the UK is currently seeking a digital tech deal with the US.

In her response to US actions so far, European Commission President Ursula von der Leyen has been clear: the EU will continue to seek negotiated solutions, while safeguarding its economic interests. That thinking should apply also to digital trade, because both parties have much to gain from deepening their digital trade relationship and a deal could still be possible if the United States was open to changing its current position. The National Board of Trade has previously outlined how a path to get there could look.

5. Diversify from the US by advancing digital trade policy integration with more partners

Given that the EU is currently facing both this difficult challenge from the US and must address economic security concerns with China, it is more important than ever to rapidly advance integration with more partners. In general, the EU has lately made progress towards finalising the FTA with Mercosur and have begun making progress towards an FTA with India.

For digital trade, the EU has recently negotiated modern digital trade commitments including rules on data flows, source code and important regulatory cooperation. Such deals have been reached with partners like Japan, Singapore and Korea, but further progress is needed. The EU should prioritise updating more FTAs with modern digital trade chapters, starting with partners such as Canada. Moreover, the EU should invest in expanding the number of countries covered by an adequacy decision for data transfers under the GDPR.

Conclusion

In conclusion, the EU should continue to take an evidence-based approach to responding to Donald Trump’s costly trade war, even if it enters the digital sphere. That includes I) recognising the complexity of digital value chains, II) maintaining objective enforcement of existing digital legislation while evaluating how digital rules could be revised to strengthen EU trade, III) attracting US tech talent to the EU, IV) keeping the door open for digital integration with the US, and V) advancing digital trade policy integration with more partners.