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Red Bull, Glock May Be In Firing Line For Next Round of U.S. Digital Tax Retaliation

Austria 12 Cons. Discr. - Apparel 360 Cons. Discr. - Durables 323 Cons. Discr. - Retailing 297 Consumer Staples 602 Italy 55 Tariffs 1633 Turkey 51 U.S. 4559

The U.S. government’s section 301 investigation into France’s digital services tax will be extended to similar tax arrangements being applied in Austria, Italy and Turkey. The approach to be followed will likely be similar given Austria, Italy and Turkey’s taxes are likely to be based on similar rates and thresholds. 

Those include an in-country, revenue-based tax (3% for Austria and Italy as is the case for France, and 7.5% for Turkey) with a $750 million global revenue threshold and varying local revenue thresholds.

The reasoning for applying tariffs to French exports in retaliation for the digital services tax, discussed in Panjiva’s Dec. 3 research, is specifically due to the targeting of US firms both via thresholds and commentary from French politicians. Furthermore the U.S. authorities cited the  retroactive application of French applications to start of 2019 and focus on revenues as reasons to act.

The U.S. has also noted that the French move was unilateral despite an ongoing OECD process to address base erosion and profit shifting (BEPS) in taxation that has been ongoing since 2013, The G20 has asked for conclusions to that investigation in 2020. Additionally EU plans from March 2018 were rejected by Ireland, Sweden, and Denmark – unanimity is needed for the EU to apply market-wide taxes.

Further friction may be caused by British plans, reported by the Financial Times, to also apply a DST. That may overshadow post-Brexit trade negotiations between the U.S. and U.K.

So far though no details have been given by the U.S. Trade Representative on why the level of tariffs or products covered were chosen. It may be reasonable to assume that a simlar level and targeting may be used for the cases against Austria, Italy and Turkey.

The products proposed for tariffs on French exports were equivalent to $2.38 billion of imports in the 12 months to Sept. 30, or 4.1% of total imports from France. There was also a focus on luxury consumer goods – potentially cutting consumer backlash and economic disruption in the U.S. – rather than more disruptive supply chain products.

From a timing perspective the USTR review of France was launched in July, while there are still consultations to navigate until at least late January. That would suggest tariffs on imports from the other three countries may not be imposed until mid-2020 at the earlier.

There’s likely to be collateral damage to U.S. relations with Austria, Italy and Turkey. Indeed, the case follows the recent U.S. move to increase steel tariffs on Turkish exports in response to military intervention in Syria. Similarly an extension of tariffs on European taxes may further disrupt trade talks heading into 2020.

Panjiva’s data shows that 4.1% of U.S. imports from Italy were worth $2.31 billion in the 12 months to Sept. 30 while for Austria the figure is $570 million and for Turkey $433 million. Unlike France though the growth in imports from those countries has been minimal, with Italian exports having increased by just 4.1% year over year in the 12 months to Sept. 30 versus 10.0% for France.

The impact may be felt most keenly at the macro-economic level by Italy given the U.S. represented 9.4% of exports in 2018, compared to 6.3% for Austria and 5.0% for Turkey.

ITALIAN TARIFF TARGETING COULD BE SIMILAR IN MAGNITUDE TO FRANCE

Chart segments total value of U.S. imports on a trailing 12 months basis by origin. Source: Panjiva

Panjiva’s analysis shows that In the case of Austria the $570 million value could easily be achieved via tariffs on exports of soda under HS 2202.10 which were worth $1.03 billion in the 12 months to Sept. 30. Those are dominated by seaborne shipments associated with Red Bull. Other products that may be fruitful consumer sector targets include hand guns worth $236 million, including shipments by Glock, and motorcycles worth $157 million exported by Pierer Mobility’s KTM.

AUSTRIAN DRINKS EXPORTS TAKE FLIGHT, GUNS HOLSTERED

Chart compares U.S. imports of soda, handguns and motorcycles from Austria by product (HS-6 basis) on a monthly and three-month average basis. Source: Panjiva

For Italy the $2.31 billion value can be covered by a handful of luxury goods. Imports of wine were worth $1.47 billion for non-sparkling wine and $461 million for sparkling with major importers to the U.S. including Ecco Domani and Prestige Wines. Sunglasses worth $865 million, including Kering’s eyewear division, while leather handbags were worth $699 million with high-end shipments by Furla and budget products by Ross Stores.

In the case of Turkey exports of carpets worth $567 million could easily cover the 4.1% threshold alone, including shipments by traditional retailers such as Ikea as well as online sellers such as Rugs USA.

ITALY’S LACKLUSTER LUXURY EXPORTS FACE TARIFF CHALLENGE

Chart compares U.S. imports of wine (sparkling and still), sunglasses and handbags from Italy by product (HS-6 basis) on a monthly and three-month average basis. Source: Panjiva

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