Trump has exposed America’s world-leading firms to retaliation

At companies from Alphabet to Goldman Sachs, bosses will be holding their breath

The Economist
In Donald Trump’s view of global trade, America has been “looted, pillaged, raped and plundered by nations near and far”. Ironically enough, customers near and far who avail themselves of the services of America’s banking, consulting, and tech giants sometimes talk about them in similar terms. For foreign officials thinking about how to retaliate against Mr Trump’s tariffs, this points to an obvious target: imports of expensive American services.

One fallacy in Mr Trump’s crusade is that America struggles to sell things to the rest of the world. It is true that America has run a deficit in the trade of physical goods for decades—the object of Mr Trump’s ire. But the opposite is true in the domain of services. Whereas America’s trade deficit in goods hit a record $1.2trn last year, its services trade surplus reached $295bn, just shy of a record, even if a portion of such exports stems from a tax wheeze by American multinationals. In all America sold $1.1trn-worth of services to foreigners in 2024, nearly twice as much as any other country. America is, in other words, a powerful exporter. It just happens to excel at exporting cloud-computing capabilities, delivery networks and financial-hedging instruments, rather than metals or machines.

How might other countries go after American services? As a thought experiment—and not a recommendation—they could start by applying Trumpian logic about trade deficits to determine fair tariff levels on American services. In its shockingly crude calculations to set “reciprocal” tariffs, the White House divided America’s bilateral trade deficits by its imports from each country, and then roughly divided the result by half (an act of kindness, as Mr Trump put it). These calculations covered only goods.

The Economist has followed the same methodology for services, producing radically different results. Countries might, on average, conclude that they need reciprocal tariffs of 19% on American services in order to rectify persistent bilateral trade imbalances (see chart). To give a few examples, American service providers would face levies of 28% in China, 15% in the European Union and 41% in Saudi Arabia. Venezuela would enforce the highest of all on the few American firms doing business there: an eye-watering 47%.

If America’s trading partners did this, it would hurt their own businesses and consumers, much as Mr Trump’s tariffs on goods will hurt Americans. The hypothetical services tariffs nevertheless show how vulnerable America is to retaliation. Strictly defined, it is impossible to slap tariffs on services in the same way that tariffs are placed on goods. Services do not arrive in cargo containers; there is no way for officials to track in real-time when foreigners sell consulting advice or data-management tools.

But governments have lots of ways to impede American services, from antitrust investigations and data rules to licensing fees and extra taxes on foreign firms. In China, for example, American trade negotiators have long been less concerned by its tariffs on physical goods—many of which had been significantly lowered—than by rules preventing American banks, law firms, and tech companies from making inroads in its domestic market. From Brazil to India, regulators have been investigating American tech firms such as Alphabet and Apple for anti-competitive practices, hitting them with fines and forcing them to tame their business models.

Another bone of contention has been digital-services taxes, or levies on the revenues of tech companies. In theory, these are not meant to discriminate against foreign firms but to raise revenues from activities such as online advertising or e-commerce sales that might otherwise go untaxed. In practice, by setting a high threshold for revenues, as France and Spain have done, it is American giants such as Amazon and Meta that end up on the hook. America has been fighting hard against such taxes in Europe and elsewhere, arguing that they are discriminatory. Europe’s appetite for compromise may now be rather diminished.

And that could just be the starting point for European retaliation against American service providers. In 2023 the European Union introduced an “anti-coercion instrument”, first motivated by threats from China. The instrument allows the eu to respond to diplomatic coercion using just about any measure deemed necessary. It could, for instance, exclude American firms from its enormous public procurement market or curtail their intellectual property rights. Such actions would not be tariffs in the traditional sense but would achieve much the same result: providing an advantage to domestic firms.

For decades American trade negotiators have been intent on reducing global barriers to overseas sales of financial know-how, tech prowess, logistical muscle, and more. They helped re-orient the World Trade Organisation towards a focus on services and also made the digital economy a central component of new deals such as the Trans-Pacific Partnership (though Mr. Trump withdrew from the tpp in his first term). Now, armed with the president’s hefty new tariffs, American negotiators have more leverage to push their demands for greater liberalization of trade in services.

But there is a big caveat, says Michael Froman, America’s lead trade negotiator under Barack Obama. “For leverage to be meaningful it has to be taken out for a drive. You have to actually have a list of what it is that you want the other countries to do, and you will need to trade away the tariffs for progress on those issues,” says Mr Froman, now president of the Council on Foreign Relations, a think-tank. “So the question is whether this administration is ready to use the tariffs as leverage or whether it is determined to maintain them nonetheless.”

If Mr Trump chooses to maintain his tariff wall around goods—and he has given every indication that is his intention—then the chain from cause to effect will flow in the reverse direction. Rather than America using its tariffs as a battering ram to expand its exports of services, other countries will use their imports of American services to strike back at Mr Trump’s tariffs. They have plenty of scope to inflict pain on America’s most competitive global firms.