EU looks to target Big Tech in trade war with America

Europe is ready to get creative to win the next bout of the trade war against America.

The EU is preparing a law that could allow its executive body, the European Commission, to hit back against U.S. tariffs by imposing sanctions on the intellectual property of companies such as Amazon, Google and Facebook.

In a rare united front, Europe’s main political groups on July 6 backed proposals to strengthen the EU’s trade powers by expanding them into the realm of services and intellectual property rights, which they argue would allow them to match U.S. trade firepower.

“I’m satisfied to see that there is big support for Europe to muscle up,” Marie-Pierre Vedrenne, who authored the draft law, told POLITICO.

Vedrenne, from the centrist Renew Europe group, has the backing from the center-right European People’s Party and the center-left Socialists and Democrats. All argue that it is time to radically modernize the EU’s trade arsenal.

When the EU imposed tariffs on Harley-Davidson motorbikes to retaliate against Donald Trump, the company quickly shifted its production to factories in Thailand.

With the World Trade Organization at an impasse, the EU has been looking at ways to develop a new trade tool to retaliate against President Donald Trump’s tariffs, but had originally only focused on goods. The political parties are now shifting this “enforcement regulation” into services.

“In the event of a trade attack, the EU cannot afford to remain passive. We want to be able to answer with powerful weapons and today we load our trade bazooka,” said Anna-Michelle Asimakopoulou, who leads the file for the EPP group.

Bernd Lange from the Socialists and Democrats, and chair of European Parliament’s trade committee, told POLITICO that it is “necessary” for the EU to be able to “go after … software companies” such as Google and Facebook that are currently exempt from any EU trade retaliation because they mainly export services rather than goods.

Trade war 4.0

Lawmakers in Brussels think sanctions on services will be a bigger deterrent than tariffs on soybeans and machinery.

They would also be a better fit for highly globalized value chains, where production easily jumps borders.

When the EU imposed tariffs on Harley-Davidson motorbikes to retaliate against Donald Trump, the company quickly shifted its production to factories in Thailand, avoiding the tariff pain.

Sanctions directly targeting a company’s intellectual property, by contrast, would catch a larger share of America’s high-value exports, and would be much harder to circumvent.

Experts contacted by POLITICO agreed that trade retaliation on services and intellectual property would be a powerful weapon, but cautioned that the U.S. could react furiously.

“Tariffs on Bourbon and Boeing is one thing, but cross-retaliation against copyright and religious symbols like [trademarks] is a whole different level of warfare,” said Hosuk Lee-Makiyama, director of the ECIPE think tank.

While most EU businesses have remained quiet, some are getting nervous. Anders Rehnberg from the Confederation of Swedish Enterprise said he saw “major risks with such an approach” and called on the EU to first study the “impact” the law would have.

Still, considering the cross-party consensus in Parliament, and growing support from powerful EU countries, the EU is now likely to follow through.

Negotiators from the European Parliament, the Commission and EU countries are meeting on Friday to start ironing out the details of the law.

Germany, which will negotiate for EU countries, said it wants to agree on the new law “within the first months” of its presidency of the Council, which started in July.

France and Italy have publicly backed Parliament’s position to expand the trade powers to intellectual property and services.

Germany in principle agreed that expanding the scope to services and intellectual property makes sense, officials briefed on the country’s position said. However, Berlin is skeptical that the idea can be turned into practice quickly enough, warning that ironing out the legal questions could take a lot of time.

Conflicts to come

Officials in Brussels say the law would boost the EU’s “autonomy,” its capacity to stick to policy goals in the face of threats from Beijing and Washington.

As Brussels plans to go ahead with policies that are likely to upset its trade partners — such as new charges on carbon emissions and a tax on digital giants such as Google and Facebook — officials and diplomats argue the EU must be ready to stand its ground.

Some pointed to past defeats where Brussels backed down in the face of American trade threats. In 2012, the EU scrapped plans to charge domestic and foreign airlines for their emissions when flying to EU airports, after the U.S. and China threatened to punish EU airlines and airplane-makers.

“There are a few precedents where countries said they would retaliate on intellectual property rights, but this has never been put into practice” — Grosse Ruse-Khan, reader in intellectual property law at the University of Cambridge 

Vedrenne, the lawmaker, said she hopes the new weapon would prevent new trade wars. “It is important that we have a complete legal arsenal to be used if necessary,” she said. “This would be a dissuasive instrument.”

Trade diplomats pointed out that the prospect of being hit directly would make America’s Big Tech companies think twice before calling for a trade war with Europe.

Indeed, companies such as Google and Facebook, which have lobbied Washington hard to impose tariffs on EU countries for their planned digital taxes, have had little to fear so far, as any EU retaliation would have left them unscathed.

With the new EU law, any tariffs would boomerang right back in their faces.

“If we did not include services and intellectual property, we would be incoherent,” Vedrenne said.

Pirates of the Caribbean

In doing so, the EU will stray into largely uncharted territory. Experts point out that while retaliation on IP is in principle possible and legal, it has never been tried out.

“Including services and intellectual property is a smart move, but will not be easy to put into practice,” said Henning Grosse Ruse-Khan, a reader in intellectual property law at the University of Cambridge who published a much-quoted paper about retaliation on IP.

“There are a few precedents where countries said they would retaliate on intellectual property rights, but this has never been put into practice,” he said.

Ecuador in 2000 won the right to retaliate on EU intellectual property against unfair tariffs on bananas. “What Ecuador had in mind was effectively to pirate music from EU rights holders,” said Grosse Ruse-Khan. The World Trade Organization allowed Ecuador’s plan to sell pirated copies of EU music.

“While it never followed through on that threat, there are people who argue that’s what caused the EU to eventually give in and abolish its preferential tariff regime,” said Grosse Ruse-Khan.

Similarly, Antigua and Barbuda planned to retaliate against a U.S. decision to ban Antiguan online gambling sites by hitting back on IP. In 2007, the WTO authorized Antigua’s plan to set up a streaming platform for pirated Hollywood movies, as long as the pain inflicted remained proportional. Antigua never followed through, but the case became known as the “pirates of the Caribbean.”

One problem with the “pirates of the Caribbean” retaliation was that it was difficult to determine the value of pain inflicted, said Grosse Ruse-Khan.

For the EU, beyond the practical problem, there is a big “reputational risk” if it tries to go further down that road. “The EU is a big proponent of strict intellectual property protections internationally, so it would lose a lot of credibility if it engaged in practices seen as pirating.”

That’s why the EU is mulling a different way to go after IP holders.

Paying up

EU lawmakers and diplomats said they had a more subtle approach in mind.

One possible solution is to increase the fees that foreign companies paid to the EU for registering or renewing their trademarks, rather than annulling protections, four officials said.

Indeed, Grosse Ruse-Khan said that approach “sounds overall reasonable,” but warned that for example trademarks were only renewed periodically every few years, which would make an immediate retaliation tricky.

“From an internal EU perspective, the regulation needs to be compatible with the EU’s own protections of intellectual property, including the EU Charter on the Protection of Fundamental rights — which include IP,” he said.

Officials both from the Council and the Parliament said working out how far they could go to make sure the EU is still complying with its own rulebook would be the main task for the months to come.

Vedrenne said Parliament’s legal experts are already on it. “When there’s a will, there’s a way.”

This article is part of POLITICO’s premium policy service Pro Trade. From transatlantic trade wars to the U.K.’s future trading relationship with the EU and rest of the world, Pro Trade gives you the insight you need to plan your next move. Email [email protected] for a complimentary trial.