Speaking at Davos, Chancellor of the Exchequer Sajid Javid stated that the UK will be going ahead with its proposed Digital Tax. Expected to be in place for April 1st, 2020 the tax is designed to target multinational corporations/ conglomerates with a revenue derived from either from the provision of a social media platform, a search engine or an online market place, so says the policy paper.

However, many of the companies that are active within the UK operating within the aforementioned markets are American companies – Facebook, Google, Amazon etc. The US has been vocal about its opinions on the tax, with the US Secretary of the Treasury Steven Mnuchin calling the tax discriminatory in mature and stating “International tax issues are very complicated, they take long times to look at and if people want to just arbitrarily put taxes on our digital companies, we will consider arbitrarily putting taxes on car companies.”

This comes shortly after a time where the UK has suffered unworldly uncertainty and domestic-political unrest. Coming out of the election, with a majority government not seen since the 1980’s that’s main campaign slogan was “Get Brexit Done”, it could be seen as a promising time with light at the end of the tunnel. The Chancellor had the same message, directly calling it “Economic and Political stability” in his speech at Davos.

The value of the pound sterling is 1.18 to the euro, an 11.3% increase from the low of 1.06 in August, 2019, suggesting investors are becoming more comfortable with the UK economy once again.

So how exactly would a ‘Trade-War’ with the US play out for the UK, why the Automotive industry in particular, and where does the rest of the world sit on the concept of a digital tax?

Digital Tax 101

The main arguments of the digital tax were well presented by members of the panel at Davos – people such as Kristalina Georgieva, Head of the International Monetary Fund (IMF). Many large nations around the world agree that large corporations operating within the above markets should pay more – or “their fair-share” in tax. How this is done however, is causing debate, and it is that debate that could have a significant impact on US-UK trade.

There are arguments for a bilateral tax arrangement, so that the monies paid by these digital firms are doing so in the correct manner with fair agreements across the world, rather than “here there and everywhere” as Kristalina Georgieva stated. In fact, together with Mnuchin the argument for the best way to get the digital companies paying their fair-share is through an international agreement with the OECD.

The UK’s stance on this is that the proposed levy of 2% of its revenues (if global digital revenue is in excess of £500m and more than £25m derived from the UK) is but a temporary measure, and is designed to fall away once an international agreement has been reached.

Current Tensions

The US has, of course been the headliner throughout 2019 when it comes to international trade disputes. This trend looks to continue, however it is now a question of with whom will it ensue? Right or wrong, the current US presidential administration has taken a firm stance on international trade – this now applies to services alongside goods.

Up until now, the UK has not been alone in the debate for a digital tax. The GAFA tax, proposed by the French President Emmanuel Macron looked to specifically target the US companies Google, Apple, Facebook and Amazon. The US retaliated with an initial threat of imposing $2.4bn (roughly £1.8bn) worth of tariffs on French goods including Wine, Cheese and porcelain dishes.

Following this, there were further retaliatory threats, with the EU telling the US they “will respond as one” and now they are preparing to settle the dispute by reaching some form of international tax agreement.

The threats on the imports of wine and cheese are reason for concern for France. Being the main exporter for sparkling wine in the world (export value £3.5bn) tariff impositions could have significant impact on the nations trading relations and thus, income.

According to the Observatory of Economic Complexity, France is the 6th largest in the world and the 14th most complex. Having imported $595bn and exported $515bn, France stands as a strong contender in the global economy. More specifically to the US, exporting $1.25 tn and imported $2.16 tn globally in 2017, French-US trade is significant and complex.

At one point, the Trump administration had suggested levies up to 100% on the aforementioned $2.4bn worth of goods. Having imported $53.5bn from the French in 2019, the US provide a stable market for the European nation, with top trading products in values terms being Cars, Petrol and Aircraft parts. On the other hand, the US exported a reported $34.5bn to France, with their trop trading products being in the car parts, helicopters, planes and computers.

UK – US Tensions

The UK’s place as another significant player in the global economy is indisputable, exporting £490bn and importing £671bn in 2018 according to the WorldBank. Automobiles placed 4th in the list of top product Exports for the UK and according to the Office of the United States Trade Representative, US goods and services trade between the UK and US totalled an estimated $261.9 bn in 2018. In 2018, the UK was the US’ 7th largest supplier of goods imports ($60.8bn), of which vehicles accounted for $11bn. For services, the US imported roughly $60.7bn from the UK.

In export terms, the UK was the US’ 5th largest goods market to export to in 2018, accounting for $66.3bn. With regard to services, the US exported an estimated $74.1bn in 2018, up 5.8% – a substantial value.

As we can see, cross-hairs hovering on British Automobile exports and US digital services are cause for concern. In 2018, Google, who employ 3,280 people in the UK paid the Treasury £49.3m in corporation tax, on it’s UK profits of £202.4m. This is an important aspect of the digital tax proposed – it is based and calculated on a firms revenues rather than profits.

UK Automotive Cost-Benefit

The Society of Motor Manufacturers and Traders (SMMT) is one of the UK’s largest trade associations, and they state on their website the automotive industry is worth more than £82bn in turnover per year, adding £18.6bn in value to the UK Economy.

They go onto present industry statistics such as employment (168,000 directly) 1.52 million cars built in the UK in 2018, and the fact that 8 out of 10 cars produced in the UK are exported overseas.

All of the above is reliant on the demand from the US without a replacement trading partner. With reduced demand due to import tariffs, domestic revenue falls which can cause businesses to restrict operations in order to remain active – much of this activity is detrimental to the labour market.

Evidence of this is with the recent US-China trade-war activity. In TFG’s article on the World Economic Forum’s January brief, we highlighted a paper published by the United Nations conference on Trade and Development entitled “Trade and Trade Diversion Effects of United States Tariffs on China”. We also emphasised its findings that higher prices are a direct result along with a sharp decline in bilateral trade.

Although a trade-war may be far away, and some may say unlikely, there is no doubt this topic will be present in both Trump and Johnson’s communications over the coming weeks, with Mnuchin stating in Davos “I’m sure the President and Boris will be speaking on it as well. This is an important issue that we’ll deal with”.