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POLITICO Pro Morning Trade: EU-US talks — Digital services tax — Industrial strategy

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with Maxime Schlee and Doug Palme..

View in your browser or listen to audio By HANS VON DER BURCHARD with Maxime Schlee and Doug Palme..
POLITICO Pro Morning Trade
View in your browser or listen to audio


with Maxime Schlee and Doug Palmer


— Angela Merkel talked up the prospect of two-step trade talks with the US, but making progress will likely be difficult in practice.

— Paris and Washington have reached a deal over Frances digital services tax, but Donald Trump has refused to officially drop his tariff threat on French wine.

— The EUs top civil servants want to switch to a more defensive European industrial strategy, but Nordic countries have raised concerns about the plans.

Bonjour et bienvenue à Morning Trade! The G7 summit in Biarritz wrapped up Monday, and it was full of trade. We have a run-down of what happened.

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MERKEL TALKS UP PROSPECT OF TWO-STEP US TRADE TALKS: German Chancellor Angela Merkel expressed fresh hope Monday that the EU and U.S. could still agree on launching their bilateral trade talks based on Brussels existing negotiation mandate, while potentially including agriculture at a later stage.

“I championed for beginning these talks based on the existing mandate that the European Commission received from [EU] member states,” Merkel told reporters following a bilateral meeting with U.S. President Donald Trump on the sidelines of the G7 summit in Biarritz, France.

She also hinted at the possibility of including farming products at a later stage of negotiations: Merkel said the two sides could first “begin with talks and then we get a process going.” She added: “That cannot be the full agenda.”

This idea is not new: German Economy Minister Peter Altmaier already proposed such a plan during a visit to Washington in July. But his U.S. counterparts were reluctant: They fear that the EU will have even less interest in discussing the difficult issue of agriculture at a later stage if both sides have already agreed a deal in the area of industrial tariffs.

Trump hopeful of avoiding car tariffs: Ahead of the meeting with Merkel, the American president answered questions from reporters on whether he was planning to impose duties on cars and car parts from Europe: “I hope not. We are gonna come to some conclusions. We talked about a new trade deal … We are having some very good discussions going on.”

Look at Japan: Trump also urged Merkel to look at the “very big deal” he announced with Japanese Prime Minister Shinzō Abe in Biarritz on Sunday: “We hope to have a deal with the European Union too — I hope we can do it, a fair, good deal for everybody.”

That agreement mainly lowers Japans high agricultural tariffs in exchange for a reprieve from Trumps threatened 25 percent auto tariff. As things stand, it will be difficult for Europe to directly copy Japans success formula.

How close are we? At his closing press conference, Trump said his administration was “very close” to striking a deal with the EU — an astonishing comment given that official talks havent even started yet.

Sudden harmony: The Trump-Merkel meeting was remarkably relaxed in comparison to previous, often uncomfortable encounters between the two leaders. Trump called the chancellor a “brilliant woman.”


FRANCE AND US STRIKE COMPROMISE DEAL ON DIGITAL TAX: Washington and Paris reached a compromise on Frances digital services tax, French President Emmanuel Macron said Monday. “We have found a very good agreement,” he said at a closing press conference in Biarritz.

However, speaking at the same press conference, Trump avoided answering whether he would drop his threat of taxing French wine in retaliation of the tax.

According to people close to the negotiations, French Finance Minister Bruno Le Maire and U.S. Treasury Secretary Steven Mnuchin had struck a preliminary agreement that was presented to the heads of state during the G7 summit.

The compromise: The deal will have tech companies pay the 3 percent levies on their revenues until the OECD reaches a broader agreement meant to reform international digital taxation, Macron said. In case a deal is struck, Paris will reimburse the difference between whatever rate the OECD countries set and what companies paid France in the meantime.

Keeping up the pressure: Earlier the same day, Trump had again threatened to slap tariffs on French wine exports in retaliation over the digital tax: “Am I gonna tariff French wine? Well, it depends on the deal we work out on the digital tax.”

But speaking after the summit, Trump refrained from withdrawing the threat. Asked whether he would lift it, he said he could confirm his wife likes French wine.

Not on board: American companies stand to lose badly under the U.S.-French agreement, U.S. Senate Finance Committee ranking member Ron Wyden said overnight. “The Trump administration should reject any deal that allows France and other countries to move ahead with discriminatory taxes on U.S. technology companies, in exchange for vague promises down the line,” Wyden said in a statement. “If Donald Trump gives France a pass now, then it will be open season for foreign governments to go after major American employers.”

MACRON SAYS G7 AGREED TO ACCELERATE WTO REFORM TALKS: “What we decided … was to accelerate [talks] with a very realistic agenda,” the French president told reporters. But Trump said he was not satisfied with the scope of proposed reforms. Nevertheless, “were getting there,” he added. Read more.

Final text: Read the G7 leaders declaration here.

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TRUMP CLAIMS CHINA ASKED FOR RENEWED TRADE TALKS: Trump claimed on Monday that Chinese officials are prepared to return to the negotiating table, signaling there may be a path to a potential détente in his tit-for-tat trade war with Beijing.

“China called last night our top trade people and said lets get back to the table. They have been hurt very badly, but they understand this is the right thing to do and I have great respect for it,” Trump said on the sidelines of the G7 summit.

“They want to make a deal,” Trump continued. “Thats a great thing.”

Is it true? Chinese Foreign Ministry spokesperson Geng Shuang seemed to dispute the presidents claim that a pair of phone conversations had taken place. “I havent heard about this,” he told NBC News.

Mnuchin told reporters that Chinese Vice Premier Liu He had called for talks to resume when Trump pressed him for details during a bilateral meeting later in the afternoon with the Indian prime minister. It was not immediately clear, however, if Mnuchin was referring to a phone call Liu made to U.S. officials or his comments at a technology conference earlier in the day.

TRUMP: NO PLANS FOR AUTO TARIFFS ON JAPAN: The U.S. president confirmed Monday that he no longer wants to impose national security tariffs on auto imports from Japan now that the two countries have reached an agreement in principle on some trade concerns.

“Not at this moment,” Trump said. “Thats one of the reasons we made the deal.”


A MORE PROTECTIONIST, EU ECONOMIC MODEL IN THE MAKING? The EUs top civil servants are making the case for switching to a more defensive European industrial strategy as trade wars on the outside and Euroskeptic populists on the inside threaten the European project.

In a 173-page memo, European Commission officials mapped out what they want President-elect Ursula von der Leyens priorities to be — including stricter trade defenses, more loopholes in competition rules and a new approach for public funding for the industry. The language of the memo echoes calls from Germany and France to revamp to blocs industrial strategy to allow for the creation of so-called European champions.

The reasoning: Brussels isnt equipped for a world in which Sino-American trade wars bring global trade back to a might-is-right era, the Commission document shows. Stricter trade defenses are needed because “the EU would be very ill-suited to survive in a purely power-based world order,” the EU officials argued.

A spokeswoman of the outgoing Commission argued that the memo is a “draft internal brainstorming document” that isnt “mature” enough to be presented to von der Leyen. But the fact that its reasoning and the plans it presents are significantly in line with what France and Germany want regarding an industrial strategy makes it seem unlikely that the proposals will end up gathering dust in a drawer of some desk.

Nordic reluctance: However, Finlands Trade Minister Ville Skinnari warned it would be unfair for big countries alone to determine the agenda and was cautious as to how much protection Brussels needs: “We need an industrial strategy, thats for sure. But now the question is how we do that. Its very important that we stay together and have a common approach.”

Read more here or below.


EXPERTS DRAW UP BACKSTOP ALTERNATIVE: British Prime Minister Boris Johnson used the G7 summit to — once again — reiterate his position that for the U.K. to leave the EU with a deal, Brussels would need to renegotiate the Withdrawal Agreement and drop the Northern Irish backstop solution. But meanwhile, a team of experts has come up with a plan to replace the backstop solution and thus get rid of a major hurdle for avoiding a no-deal Brexit.

How it would work: The proposal suggests that customs checks at the border could be avoided by setting up a network of “EU Trade Centers” across the U.K. and Ireland. At those centers, “all goods destined for the EU or the U.K. respectively via Northern Ireland would be processed, including payment of duties and the like, before they actually left British or Irish territory.” Read more here or below.


MACRON SAYS HE HOPES BRAZIL GETS A NEW PRESIDENT: In extraordinarily blunt remarks on Monday, Macron said he hoped that Brazil will soon have a new president.

“I hope they will very soon have a president who is up to the task,” Macron told reporters after he was asked about recent, insulting comments that Bolsanaro and a member of his team made about the French president and his wife.

The comments are likely to worsen French-Brazilian tensions that have already degraded in recent days over Amazon rainforest fires, Bolsonaros initial reaction to them, and Macrons threat to block the EU-Mercosur trade agreement as a consequence. Read the full story here, or below.

In a TV interview later on Monday, Macron also insisted that “the text [of the Mercosur agreement] … must be reworked. I never gave my final approval because we didnt have the final text.” And regarding his accusations that Bolsonaro had walked back on his commitments: “I wont sign the Mercosur agreement as is.”


Europes last line of defense

— By Jakob Hanke

Fortress Europe isnt taboo any more.

Calls for a more protectionist European economic model are growing, thanks to the trade war and Euroskeptic populists.

Europes top civil servants are warning that its time to switch to a more defensive industrial strategy if the European project is to survive a perfect storm of external threats such as U.S. President Donald Trump on one side, and internal powder-kegs like French populist leader Marine Le Pen on the other.

European Commission officials, in an unusually frank 173-page memo of what they want to be the priorities of incoming President Ursula von der Leyen, have mapped out a new approach of generous public funding for industry, more loopholes in competition rules and stricter trade defenses. That is music to the ears of France and Germany, and chimes perfectly with their ambitions of forging “European champions” to compete with American and Chinese rivals.

The language of the Commission document is stark when it comes to the prospects of survival in an environment where the U.S. and China are pulling global trade back to a lawless era of might-is-right. The EU officials said they needed tougher trade defenses because “the EU would be very ill-suited to survive in a purely power-based world order.”

France and Germany were furious that the outgoing Commission blocked a mega-merger between Siemens and Alstom.

In an obvious allusion to the rise of anti-EU populists at home, the officials noted that the EUs free-trading agenda often became a “scapegoat for broader social and economic pains.” In response, they stressed that trade policy could play a role in helping to defend the poor by securing “a level playing field” — a phrase that often refers to restrictions on highly subsidized Chinese companies — and by increasing trade barriers on countries with lax environmental standards.

A spokeswoman for the outgoing European Commission dismissed the memo as “draft internal brainstorming documents” that were not yet “mature” enough to make it to von der Leyens desk.

The plans are not likely to be put in a drawer and forgotten, however, as they are exactly in line with measures sought by the two powers that really can dictate policy in Europe: France and Germany.

Franco-German engine room

Both France and Germany were furious that the outgoing European Commission of President Jean-Claude Juncker this year blocked a mega-merger between Siemens and Alstom that would have created a European rail giant. While Brussels argued the deal would have hiked prices for consumers, Berlin and Paris lambasted the Commission for being naïve about the rise of China and for cleaving to outmoded competition rules.

With Britain leaving the EU as the blocs strongest advocate of free-trading liberalism, France sees a prime opportunity to take a more protectionist tack during the von der Leyen mandate.

Frances Economy Minister Bruno Le Maire, who was one of the leading voices calling for an overhaul of EU rules after the veto on Alstom-Siemens, told POLITICO: “The EU needs to think big and protect its interests.”

When asked about what the priorities should be for the next five years, he said: “We are at a turning point for the European project. With the new Parliament and Commission, we have an opportunity to redefine priorities and make radical changes. On the economic front, we both need to be more competitive globally, generate more growth and jobs, whilst also providing greater protection to our citizens.”

Somewhat unusually, that kind of language has also emanated from Germany and its all-powerful business lobby, the BDI, in recent months. The doctrine of picking winners is back. German Economy Minister Peter Altmaier, who has also stressed the need for a new approach to building European champions, has laid out plans for special state support for key industrial sectors such as cars, machinery, medical technology, 3D printing, aerospace and defense.

Nervous Nordics

Rather than strengthening Europe, however, there is also a risk that a Franco-German lurch toward more dirigiste policy could open some faultlines in the EU, particularly with Nordic and Benelux nations that are traditionally more closely allied to the free-trading British campRead More – Source