On The Brink of An EU/US Trade War As Deadline Approaches

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While the key focus so far this year has been on the on-going trade disputes between the US and China, focus is now shifting back toward Europe where the outlook is darkening. Not only is Europe currently facing more political turmoil due to the on going Italian elections debacle, the EU now finds itself on the brink of a trade war with the US, as it has only today left to stop President Trump from increasing tariffs on EU steel and aluminium.

Trump Offers Exemption

President Trump has said that he will permanently exclude the EU from any US tariffs on the import of steel and aluminium but, in return has demanded that the EU create voluntary export restrictions on steel and aluminium from the EU. Given that Trump has said that the EU will be permanently and unconditionally excluded from US tariffs, the EU does not want to step outside of the World Trade Organisation rules for international trade. This makes it extremely difficult to concede to the President’s demands without some humiliation.

eu usa trade war

However, with Germany leading the pressure, EU talks have now shifted away from a fight concerning principals and are now focused on a more practical approach looking at how to avoid a trade war which would hurt both economies.

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Close To Informal Deal

Trade-focused new agency Bordelex, this week reported that the US and EU are close to striking an informal deal which would cap EU steel shipments to the US at 90% of the 2017 import level. Essentially, in this instance, the EU would not have to officially announce a limit on exports to the US which would contravene WTO rules. Furthermore, the EU has reportedly agreed to negotiate industrial tariffs and the liquefied natural gas trade.

However, if negotiations fail and the US imposes higher tariffs on EU steel and aluminium, this could fuel tit-for-tat retaliation and spark a trade war between the US and the EU. The EU has already published a list of 185 US exports which will be targeted with tariffs in such a case. However, it is worth pointing out that such a scenario would only cause minor economic damage to both sides.

Possible Impact on EU and US Economies

The direct impact on the EU economy from US tariffs on steel and aluminium would be constrained as exports to the US of these two metals only accounts for around 0.3% of global exports by the EY and only 0.05% of EU GDP. The impact on the US economy would be equally negligible as the total value of the products contained within the published list of those identified by the EU comes to around 0.1% of global US exports and interestingly, the majority of the products appear to be those that come from the constituency of important US politicians such as Bourbon from Kentucky, home of senator Mike McConnell.

With 88% of EU steel and aluminium exports going somewhere other than the US the damage will likely be felt most in specific EU-member economies which have the most exposure to the US through steel industries such as Sweden, Germany, Italy and Greece. For aluminium, the countries with the most exposure are France, Austria and Italy. France is the largest of these with around 6% of its aluminium going to the US.

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What Retaliation Might We See?

In terms of scoping out the possible tit-for-tat we might see, Trump has already said that a tariff of 25% on the import of EU cars would be an effective counter against any retaliation by the EU. Part of Trump’s announcement last week was that the US government will be looking into whether the import of foreign cars is at odds with national security, highlighting his willingness to escalate the trade war if necessary.

on the brink of the eu usa trade war

 

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