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Trump Strikes Conciliatory Note on France Trade Threats -- 4th Update

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12/03/2019 | 02:16pm EST

By Catherine Lucey and Noemie Bisserbe

PARIS -- France bristled at President Trump's plan to impose tariffs on French imports, saying the European Union stood ready to retaliate and raising the specter of a trans-Atlantic tit-for-tat.

As Mr. Trump and President Emmanuel Macron of France met on the sidelines of a North Atlantic Treaty Organization summit in London on Tuesday, the leaders tried to paper over the trade tensions, which erupted Monday evening after the Trump administration proposed levies of up to 100% on $2.4 billion of French imports.

The Trump administration proposed the tariffs -- which would hit products ranging from cheese and Champagne to handbags and porcelain -- in response to France's new digital-services tax, which Mr. Trump says targets U.S. tech companies such as Apple Inc. and Alphabet Inc.'s Google unit.

"I think we'll probably be able to work it out," Mr. Trump told reporters, before alleging the EU was created in part to "take advantage of the United States" and engineer persistent trade surpluses. "The digital tax is the least of it," he added.

From the vineyards of Champagne to the workshops of Chanel, the industry behind France's art de vivre is suddenly facing the reality of an escalating trade dispute between the U.S. and the European Union.

The sheer magnitude of the proposed tariffs threatens to bite an industry -- European luxury goods -- that investors once believed was better insulated from trade tensions. The industry's well-heeled clientele are less sensitive to higher prices than customers in other sectors such as steel and aluminum -- which were hit by U.S. levies of up to 25% -- but they aren't immune.

"One hundred percent, it's quite high," said Bruno Pavlovsky, president of fashion at family-owned Chanel. "It's not a tariff. One hundred is a fine."

Shares of French luxury conglomerates LVMH Moët Hennessy Louis Vuitton SE and Kering SA were down nearly 2% in afternoon trading. Hermès International, purveyor of handbags that can top $10,000, had fallen 2.4%.

Earlier in the day, French Finance Minister Bruno Le Maire said the tariff threat was unacceptable. Speaking on French radio, Mr. Le Maire said he had discussed the matter with the European Commission, the EU's executive arm, adding that if America went ahead, "The European Union would be ready to retaliate."

"The European Union will act and react as one, and it will remain united, " said Daniel Rosario, a commission spokesman. He said the EU was coordinating closely with French authorities on next steps, which would depend on whether and how the U.S. moves forward.

One of Washington's options could be to take the matter to the World Trade Organization, in which case the EU would immediately engage with the U.S. "to solve this issue amicably" without lengthy litigation, Mr. Rosario said.

A number of other countries -- including Italy and the U.K. -- have announced plans to impose a tax on digital services, saying their proposals help create a sense of urgency, without which a global deal at the Organization for Economic Cooperation and Development wouldn't be possible.

The trade spat compounded tensions between the U.S. and its allies ahead of the NATO summit, which was organized to mark the 70th anniversary of the alliance. Leaders were on edge after Mr. Macron said last month that Europe was experiencing "the brain death of NATO," renewing his call for the continent to bolster its own military capabilities.

Mr. Trump on Tuesday told a news conference in London that Mr. Macron's statement was "very insulting" and that he could see France breaking off from the alliance. Mr. Trump added that "nobody needs NATO more than the French, the one who benefits the least is the U.S."

A spokeswoman for Mr. Macron declined to comment.

The $2.4 billion in imports threatened with tariffs is slightly less than 5% of the $52 billion worth of goods the U.S. imported from France in 2018.

Still, a trade dispute could prove particularly treacherous for some luxury firms to navigate. Shifting production to the U.S. is hard when brands tout products being made in Italy or France as a selling point for consumers in the U.S., one of the industry's biggest markets.

Hermès makes its handbags exclusively at workshops in France. Chanel produces most of its goods in France and Italy, including handbags, cosmetics and perfume.

"The talent is in France and Italy," Mr. Pavlovsky said. "It would be easy if we could decide to manufacture everywhere."

LVMH is one of the world's biggest producers of Champagne, with brands including Veuve Clicquot and Dom Pérignon. The sparkling wine can only be made from grapes grown in France's Champagne region, 90 miles east of Paris. An agreement between France and the U.S. makes an exception that allows some California vineyards to call their sparkling wine "California Champagne."

LVMH is better positioned than some of its competitors when it comes to handbags. Its biggest brand, Louis Vuitton, has three U.S. workshops -- two in California and one recently opened in Texas -- but those can only supply half of the brand's leather goods sales in the U.S.

It also has four workshops in Spain and one Italy. That could allow the brand to rearrange its supply chains, shifting production destined for the U.S. away from its 16 French leather-goods factories.

The new French tax applies a 3% levy on revenue that big tech companies reap in France from such activities as undertaking targeted advertising or running a digital marketplace.

France had pledged to repeal the tax -- introduced in July -- once an agreement is reached at the OECD, including most of the world's high-income nations, on how to tax the growing internet economy.

Corporate profits are now taxed where value is created, often where a company has its headquarters or in a low-tax jurisdiction where it houses intellectual property. But in the digital age, companies can reach consumers without a physical presence, and that hurts high-tax countries such as France lacking homegrown tech giants but whose residents are customers of companies such as Facebook Inc., Alphabet and Apple.

Paul Hannon and Catherine Lucey in London and Emre Peker in Brussels contributed to this article.

Write to Catherine Lucey at catherine.lucey@wsj.com and Noemie Bisserbe at noemie.bisserbe@wsj.com

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