Don’t Forget About Trump’s Other Trade War

Sep 9
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The trade war between the United States and China has been the front-page story for the past year, but another trade war is brewing with the European Union and it looks to be getting more and more serious.

For the past year trade tensions with the EU have been escalating, primarily instigated by a trade dispute between Boeing (NYSE:BA) and Airbus (FRA:AIR.  While the dispute started in 2005, in May 2018 the WTO ruled the EU had been illegally subsidizing Airbus and failed to end those subsidies. In April of 2019, the United States Trade Representative office announced the first round of US tariffs against the EU with tariffs on goods valued at $21 billion. In July, the USTR said it’s levying an additional $4 billion in tariffs, which the USTR said it’s considering in response “to public comments and additional analysis.”

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But the WTO ruling wasn’t entirely unanimous against the US. It also found that the US failed to stop preferential tax breaks to Boeing that unfairly hurt Airbus, giving the EU the legal green light to retaliate.

In addition to the tariffs surrounding the Boeing-Airbus spat, in mid-2018  the US imposed tariffs on EU and aluminum which led to a response of duties of 25% on $2.8 billion of U.S. products — including motorcycles and bourbon.

Finally, there’s also the possibility of US tariffs against France, specifically, over its Digital Tax that targets US internet giants. While this is a separate issue from the US-EU trade war, it’s worth mentioning given the deteriorating trade relationship between the US and the region.

The World’s Biggest Trading Relationship

Although the Sino-American trade war gets most of the attention, the EU is the US’ largest trading partner, and the relationship is diverse. Everything from alcohol, textiles, aircraft, dairy products, aluminum, to autos are traded across the Atlantic. After all, the EU, as a region, is the world’s largest economy by a long shot: it’s made up of high-income economies, and three of which belong in the ranks of the world’s biggest economies.

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Data from the Office of the U.S. Trade Representative shows that in 2018, the U.S. imported $683.9 billion of EU goods and $557.9 billion from China. At the same time, it exported $574.5 billion to Europe and only $179.2 billion to China. The volume of trade between the EU and the US is 70% more than the volume of trade between China and the US.

The Disaster of a Two-Front Trade War

Although some of the points of contention the US has with both China and the EU in these respective trade wars are valid, the fact is the global economy can’t handle a two-front trade war.

The EU, with its population of 512 million, is a bloc of highly developed, high-income economies: perfect customers for US goods; the US is also the perfect customer for the EU’s high-cost, high-margin exports. But the EU has struggled to recover from the great recession of 2008, according to official data from EuroStat the region only grew by 0.2% in the second quarter.

A trade war will no doubt knock that 0.2% into negative territory, dragging the continent into another recession and eroding demand for US goods in this large, wealthy market. All this would come at the same time as the world’s other largest market — China — puts up more barriers to US goods and deals with a naturally slowing economy. Keep in mind that the EU is also dealing with the possibility of a no-deal Brexit, the uncertainty surrounding which, and further barriers, thanks to the UK’s exit from the EU trading bloc, would be a further anchor on the region’s economy.

While the trade relationship between the US and the EU is not perfect, and there are issues that need to be addressed, much like the trading relationship between the US and China, doing so with escalating threats and tariffs is not a productive means to resolve conflict. It only puts the global economy on edge and pushes the world closer to a disastrous recession.

 

 

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