Tensions between Washington and Paris had been brewing for months over Emmanuel Macron's plans to introduce a tax on digital transactions in France, which takes aim at the biggest US technology companies.
But they boiled over this week when the Trump administration took the aggressive, unilateral step of launching a probe into the French digital tax to determine if it unfairly discriminated against US companies.
The investigation could ultimately lead to US punitive tariffs on French goods, sharply ratcheting up transatlantic trade tensions at a time when they are already high.
How serious is the move by the Trump administration?
The threat to punish France for its digital tax did not come from a presidential tweet, but from a formal move by Robert Lighthizer, the US trade representative, to start a so-called section 301 investigation into the tax as an unfair trade practice.
This is the same legal framework used by the US in its trade war with China — so it is about as serious as it gets. Lighthizer's office will now make a lengthy assessment of the damage to US tech groups inflicted by the French digital tax, and if no deal is struck with Paris in the meantime, it can proceed to slap tariffs on French goods, following a public comment period.
It could take more than a year, however, for the US administration to go through the entire process, so the levies are unlikely to come imminently.
What's in the French law that triggered the row?
On Thursday France adopted a pioneering new digital tax that will impose a 3 per cent levy on the French turnover of digital companies with revenues of more than €750 million ($1.2 billion) globally and €25m in France.
The tax primarily targets those that use consumer data to sell online advertising. It will affect about 30 companies, including US groups Alphabet, Apple, Facebook and Amazon, as well as companies from China, Germany, Spain and the UK. It will also affect one French company: the advertising platform Criteo. French authorities have said that the national tax is a temporary measure that will apply until a broader international agreement is reached.
France pressed ahead with the levy after failing to secure unanimous agreement for a wide-ranging digital tax at EU level in the face of opposition from Ireland, Sweden and Denmark. French authorities have said the tax should yield €500m in 2019 and then grow quickly in the following years.
Will the UK be the next target?
The UK is marginally behind France in its plans for a digital services tax. On Thursday it published draft legislation proposing a 2 per cent tax on revenues from British users of social media platforms, internet search engines and online marketplaces.
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The tax will be levied on companies that have more than £500m ($938.6m) in revenues globally where at least £25m comes from UK users.
So long as the legislation does not get bogged down in wrangling over Brexit, the tax will be in place by April 2020 and is expected to raise £400m a year by 2022. This tax has widespread support in Parliament and is likely to win approval despite US threats.
Ministers know that the British proposals will also come under the US spotlight, but decided to go ahead anyway.
Launching the draft legislation, Jesse Norman, a junior Treasury minister said the UK proposals were "targeted and proportionate" and would be dropped if there was an international agreement on tax.
Are international efforts likely to succeed?
The governments of large European countries have long been frustrated by their inability to tax the profits of tech giants, which they believe are derived in their jurisdictions. Philip Hammond, UK chancellor, for example, complained in his annual Budget last year that "progress [was] painfully slow" and it was time to take unilateral action because, as he put it, "we cannot simply talk forever".
After EU efforts to agree a tax to cover the whole bloc fizzled out at the end of 2018, the real goal has been to secure agreement at the global level under the auspices of the G20 and OECD. With threats for the imposition of unilateral taxes, in June this year, G20 finance ministers agreed to "redouble our efforts for a consensus-based solution with a final report by 2020".
The difficulty with finding a global solution has always been that countries fail to agree an apportionment of revenues from the profits of tech giants that they see as equitable and which conforms with the principles of other taxes on profits.
What's the view in Silicon Valley?
US technology companies have been infuriated by European attempts to levy additional taxes on digital businesses, which they say could lead to double taxation. One executive at a multinational technology company said: "Given our business models it can be difficult to figure out where exactly we should pay tax. If we're going to pay more tax in Europe, that's fine, but then we should get a reduction in our US tax bills."
While many in the industry had been hoping the Trump administration would take a firm line against the French plans, several are concerned about the US taking unilateral action rather than using multilateral talks at the OECD to pursue its case.
Executives say they are most worried they could get caught in an spiralling trade war, as countries escalate protectionist moves.
Written by: James Politi, Kiran Stacey, Harriet Agnew and Chris Giles
© Financial Times