The French government enacted a tax earlier this year on revenues generated by certain firms’ provision of digital services. This digital services tax was ostensibly designed to combat the alleged “under taxation” of digital companies through base erosion and profit-shifting.

France’s digital services tax almost exclusively targets American multinational corporations in a discriminatory manner. That was the conclusion of a just-issued report from the U.S. trade representative. Authorized under Section 301 of the Trade Act of 1974, the USTR report detailed how the digital services tax unfairly burdens American firms. It also raised the possibility of new tariffs on imports from France in response.

There’s a lot to unpack, with troubling policies emanating from both sides of the Atlantic.

There are several problems with France’s digital services tax. Modeled on the European Union’s proposed digital services tax, the French version looks an awful lot like a tariff, as Gary Hufbauer of the Peterson Institute for International Economics has argued. Hufbauer wrote of the EU’s proposal: “The high revenue thresholds that subject a firm to the DST, and the exclusion of certain revenues widely earned by European firms, create de facto discrimination against US digital firms.”

That was almost certainly by design. The record presented by USTR in the Section 301 report overwhelmingly supports the position that French policymakers intended to target American firms for discriminatory taxation. For example, Bruno Le Maire, French minister of economy and finance, called the digital services tax the “‘GAFA’ tax, which stands for Google, Apple, Facebook and Amazon,” which are all U.S.-based companies. Given this clear intention to discriminate between foreign and domestic producers, the French digital services tax violates the country’s commitments to national treatment under the World Trade Organization’s General Agreement on Trade in Services.

At a time when countries, including the United States, are flouting their WTO commitments, France should be standing up for the international rules-based trading system, not adding to the system’s troubles.

Also troubling is that the digital services tax applies not to profits, but to gross revenues, with thresholds of more than 750 million euros globally and 25 million euros in France. This is an ill-conceived approach. It is commonly accepted that countries should tax profits, not revenues. As the 301 report notes: “The OECD Model Tax Convention on Income and on Capital, the U.N. Model Double Taxation Convention between Developed and Developing Countries, the U.S. model tax treaty, the U.S.-France and more than 3,000 other bilateral tax treaties in effect all reflect the principle that taxation generally should be income-based, rather than based on gross revenues for companies that earn revenues from operations in a country.” Indeed, such structures can lead to double taxation on the same stream of revenue.

The Trump administration is right to be concerned about France’s discriminatory digital services tax. Other countries are currently debating a similar tax that narrowly applies only to American multinationals that provide digital services.

But more unilateral tariffs would be a mistake. There is a better way to address these discriminatory policies without harming American consumers or triggering French retaliation against American exports.

Section 301 differs from other trade statutes, in that the goal is not to protect domestic industries but, rather, to force other countries to remove their own protectionist trade barriers that burden American exports. Unfortunately, recent results have not been promising. The U.S. is currently using Section 301 to attempt to change China’s protectionist and mercantilist trade policy practices but has only Beijing’s retaliation against American exports to show for it. After nearly a year and a half, the trade war between Washington and Beijing shows no tangible signs of a cease-fire.

As part of the compromise that converted the General Agreement on Tariffs and Trade into the WTO, the U.S. agreed to forgo unilateral enforcement under Section 301 for violations of WTO agreements in exchange for Europe’s acquiescence to binding dispute settlement. In other words, the U.S. promised to use the WTO’s dispute settlement system to target discriminatory or protectionist foreign trade policies that violate WTO commitments. Because France’s digital services tax violates its GATS commitments, the U.S. should pursue this dispute through the legally required channels at the WTO instead of imposing unilateral tariffs that will almost certainly trigger retaliation against American exports to France. In addition to pursuing dispute settlement at the WTO, the U.S. and other Organization for Economic Cooperation and Development members should be trying to resolve the issues of base erosion through multilateral negotiations.

Like the issue raised in the U.S. trade representative’s 301 report about China’s burdensome trade policy practices, the U.S. has legitimate complaints about France’s digital services tax. Yet, also like the China issues, by operating outside the confines of the WTO and its dispute settlement system to target France’s discriminatory tax treatment of American firms, the United States risks jeopardizing its moral high ground in a consequential dispute.

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