Algorithms confront tariffs: A hidden digital front in an emerging trade war

The US tech industry could be ‘collateral damage’ to President Trump’s tariffs on imported goods. The EU and other countries affected by new tariffs could use digital service taxes as their countermeasure against the United States. If the escalation of trade tensions moves into the digital realm, it could have far-reaching consequences for the internet and digital economy worldwide.

Digital services taxation as a strategic countermeasure

Taxing digital services gained traction in the late 2010s as countries grew frustrated with tech multinationals paying minimal taxes in markets with millions of consumers but no physical presence.

France, the UK, Italy, and Spain were among the first to propose digital services taxes (DSTs) of 2–3% on revenues earned by large tech firms in their jurisdictions. These DSTs were driven partly by tax fairness concerns but also carried geopolitical weight as most affected companies were American giants. Unsurprisingly, Washington quickly characterised such taxes as discriminatory trade practices, arguing they “single out US companies for taxation.”

In 2019 and 2020, the US Trade Representative launched Section 301 investigations into DSTs in France, threatening retaliatory tariffs on French wine, cheese, and luxury goods. Dealing with foreign digital taxation became a high priority for US trade and digital diplomacy.

The resurgence of digital taxation after the collapse of OECD’s negotiations

Mushrooming unilateral digital taxation initiatives led to attempts at multilateral agreement through the OECD’s Pillar One negotiations. Pillar One aimed to craft a harmonised solution for taxing digital services, reallocating profits of multinational tech firms to markets where their users reside. Over 130 countries, including the US, initially supported the framework. However, talks stalled as the US expressed reservations and faced congressional hurdles. By June 2024, negotiations collapsed entirely, ending hopes of a global truce.

The fallout was immediate. Canada, which had delayed implementing its digital services tax (DST), authorised a 3% levy retroactive to January 2022. India reinforced its “equalisation levy”—a de facto DST targeting foreign digital advertising and e-commerce transactions—while EU members like France and Italy reinstated suspended DSTs. Brussels, meanwhile, revived discussions about a unified EU-wide digital levy that can directly challenge US tech dominance.

In short, the failure of Pillar One has unleashed a wave of unilateral action. Trump’s tariffs on goods have only accelerated this trend, handing the EU and others both moral and tactical pretexts to fast-track digital taxes. Unlike tariffs, which could alienate voters through higher prices, DSTs allow governments to position themselves as equity champions—reclaiming revenue from foreign tech “free riders”.

Tariffs and interests of Silicon Valley

The ripple effects of digital taxation extend beyond balance sheets. President Trump, who has courted tech executives as allies and donors, faces intense pressure to shield Silicon Valley from foreign reprisals such as a potential EU DST that could cost US tech firms billions annually. By fixating on goods, his administration has left America’s digital giants exposed to potential fiscal and regulatory counter-measures by the EU and other countries.

Redefining tech and economic diplomacy

The use of digital service taxes as a diplomatic tool could have far-reaching impacts on international geoecoomics:

Escalation risks: In 2025, President Trump framed foreign digital services taxes (DSTs) as “overseas extortion,” threatening retaliatory tariffs—a tactic previewed in 2019 when the US paused tariffs on French goods only after Paris delayed its DST. This could lead into a cycle of retaliation, where digital taxes and traditional tariffs fuel mutual escalation.

Governance gaps: Compounding the tension is a regulatory vacuum. OECD negotiations failed. WTO lacks rules to address digital taxation. While the US argues DSTs violate trade agreements, others assert sovereign tax rights. Without multilateral consensus, disputes will fester in legal ambiguity, destabilising global trade norms.

Internet fragmentation: The digital trade war threatens to splinter the internet’s integrated infrastructure—a system that has endured despite conflicts in Ukraine and Gaza. Retaliatory digital barriers could undermine decades of gradual development of technological interconnectedness.

AI and data sovereignty: Escalating tensions may force nations to restrict cross-border data flows, stifling both e-commerce and AI development relying on vast, globally sourced datasets.

Navigating trade-offs: Ultimately, all countries—including the US—face delicate balancing acts. Policymakers must distribute the costs and benefits of digital protectionism across sectors and citizens, weighing short-term revenue gains against long-term development risks. The path forward demands economic strategy and diplomatic finesse: preserving open digital ecosystems while addressing legitimate demands for fairness in an era where algorithms rival armaments as power tools.

The high stakes of digital trade

President Trump’s tariffs may dominate today’s headlines, but the silent war over digital services will define tomorrow’s economy. The next phase of trade conflict will be fought not only over steel beams and soybeans but also on server farms and software.

US allies and rivals now hold viable countermeasures: targeting America’s tech sector, the unambiguous winner of globalisation. This untapped leverage could pressure the US into balanced negotiations—or spiral into tit-for-tat measures that choke goods trade and digital openness.

In an optimistic scenario, renewed OECD, WTO, and other negotiations would yield a compromise addressing digital taxation concerns while cooling retaliatory impulses.