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The EU drafted a plan for a hundred billion-dollar fund to take on US tech firms, or so the reports say.

I was wondering if that plan is against WTO rules as I have heard that state subsidies are illegal under the WTO. What can the U.S. do in response to the EU subsidizing its tech industry illegally? I don't think the U.S. can impose tariffs on services since they're not physical things. What can the U.S. do in response?

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    The US could ban services (like it did with online gambling, currently being litigated via the WTO). It would also need to stop subsidising its own tech industry before making any credible complaint about the EU. – user Sep 2 '19 at 8:20
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EU drafted a plan for a hundred billion-dollar fund to take on US tech firms, or so the reports say. I was wondering if that plan is against WTO rules as I have heard that state subsidies are illegal under the WTO.

It's a lot more nuanced than that. It's perfectly reasonable to provide tech-infrastructure and stimulate training (e.g. by subsidising research through universities) whereas the following may be construed as unfair subsidies (from the EU's own page on unfair subsidies):

  • a direct or potential transfer of funds (e.g. grants, loans, equity injection or loan guarantees)
  • government revenue abandoned or not collected (e.g. tax credits)
  • a government providing goods and services, apart from infrastructure
  • a government purchasing goods
  • any of the above done by a private company on the instruction of the government

What can the U.S. do in response to the EU subsidizing its tech industry illegally?

If the US thinks there are unfair subsidies harming its companies, it can use the WTO's dispute-settlement procedure to try to resolve the issue (from the WTO's page on subsidies):

The WTO Agreement on Subsidies and Countervailing Measures disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. Under the agreement, a country can use the WTO’s dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty (“countervailing duty”) on subsidized imports that are found to be hurting domestic producers.


I don't think the U.S. can impose tariffs on services since they're not physical things. What can the U.S. do in response?

Services may be hard to tax compared to physical goods, but that doesn't mean there cannot be bureaucratic rules making it more difficult for companies to operate abroad. I will give a few examples, mostly from the EU, that can be turned into difficulties (though they are often simplifications, boosting how businesses operate internationally).

In the EU's financial sector, passporting makes it easier for companies in one EU country to operate in another, almost as if working in their own country. From IG:

Passporting is the term used when a company within the European Economic Area (EEA) that undertakes activities in another EEA state without that state’s direct authorisation. Passporting is an established right for any EEA state, according to the Financial Services and Markets Act 2000 (FSMA 2000).

Another aspect that's increasingly important in services is data. In particular, the EU has rules on how personal data of EU citizens is used by foreign companies. Obviously, the US could impose similar rules for its citizens (and how EU companies deal with their data). As a concrete example form the EU's website (concerning GDPR rules and transferring personal data abroad):

You're a French company intending to expand its services to South America, notably Argentina, Uruguay and Brazil. The first step would be to check whether those third countries are subject to an Adequacy Decision. In this case, both Argentina and Uruguay have been declared adequate. You’d be able to transfer personal data to those two third countries without any additional safeguards while for transfers to Brazil which is not the subject of Adequacy Decision, you’ll have to frame your transfers by providing appropriate safeguards.

So these are all things that are not primarily aimed at protecting one's own businesses, but they may play a part in practice.

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First, the WTO doesn't really have any direct power. They merely act to provide some common framework for international agreements, and a place to settle disputes. But if the participants of the dispute do not settle, the WTO cannot do anything. So saying "the subsidies are illegal under the WTO" does not really make sense; they violate the rules, but that's not the same as being illegal. It's a voluntary club. It should also be noted that both the US and the EU are by far the biggest complaintants in the WTO - there's some criticism the WTO server mostly to maintain the position of the strongest members at the expense of everyone else (as seen in the distribution of WTO-approved tariffs between the different countries, which are sometimes eerily similar to colonial-like relations, though the disparity is much smaller than old-school imperialism).

The free-market answer is simple - reap the massive profits you get from another country subsidizing its services through money raised from taxation (or printing money). Don't forget that Google et al. aren't the only interested party here; of course they're going to object to any competition (corporations aren't exactly friends of free markets). But on average, assuming the subsidies actually help estabilish similar services in Europe, the services are going to be cheaper and better. Of course, it comes at a cost to the EU taxpayers, so this is more true for people outside of the EU than inside.

Of course, the assumption that subsidies will help is a huge one. Subsidies generally tend to decrease efficiency, and lead to poor investments (after all, if the investment wasn't poor, it would be made without any subsidies). Even if some useful service comes out of this, which is doubtful, most of the money is going to be wasted, again increasing the real cost to people inside the EU. I've worked on software subsidised by the EU, and it's no different from most EU subsidies - just a way for a few companies to get great profit margins while doing nothing of particular value.

The best the US can do is wait. If the project succeeds, US citizens are going to benefit thanks to the increased competition on the market. Some may be hurt (e.g. losing their job in Google), but that's always true, regardless of government intervention; it's not like employees of such companies will have trouble finding new jobs even if they had to leave. More likely, the EU wastes a lot of money to create nothing of real value, and nothing really changes (except for the money now missing from the pockets of taxpayers within the EU).

Of course, this is just the market picture. There are more interests to the US government than ensuring the prosperity of its citizens. Individual politicians have their own goals and means. Individual companies and corporations will try to put pressure on the politicians to maintain their dominant position. The security services are surely happy to have almost unlimited access to personal data of a significant chunk of the world, in and out of the US. But that's nothing new, and of course, the whole thing started due to the same on the part of the EU.

  • I've also worked on a project with significant funding from the EU, and I came to a different conclusion: the purpose seemed to me to be channelling money from the richer contributing countries to the poorer ones, thus serving to limit the imbalance within the eurozone and help keep it together. – Peter Taylor Sep 2 '19 at 7:40
  • @PeterTaylor Even if that was the ethical thing to do, there's a problem - the taxes vs. subsidies balance only works out if you assume the money is used as well as it would have been if it stayed in the country (ideally in the taxpayer pockets). I'm from one of those poorer countries (though more around the middle, rather than the very end), and the most visible subsidies certainly aren't good enough investments to offset the cost (the balance is pretty tight - we only get about 10% more than we give). I haven't seen any good analysis of all the investments, so no idea if it's representative. – Luaan Sep 2 '19 at 8:27

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