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A trade war with Europe would be more damaging than Washington’s dispute with China


The United
States has more to lose from a full-blown trade war with the EU than it does
with its current conflict with China, experts say.

President Donald
Trump has kept up his tough rhetoric against the European Union despite
focusing on Chinese tariffs in recent months. But his administration is due to
decide in November whether to impose duties on one of most important industries
in Europe: autos.

There have
already been tariffs on European steel and aluminium — which led the
bloc to impose duties of 25% on $2.8 billion of U.S. products in June 2018,
and, there’s an ongoing dispute regarding Airbus and Boeing —
but experts believe a wider spat with Europe would be much more damaging than
the current tit-for-tat with China. Leaders of the G-7, the world’s seven
largest economies, are due to talk global trade at a meeting in France later
this week.

trade matters most. It is by far the biggest single bilateral trade flow in the
world,” said Florian Hense, an economist at Berenberg.

exports and imports of goods and services, U.S.-EU bilateral trade exceeded
that between the U.S. and China in 2018 by more than 70%,” he added.

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.
However, looking at U.S. exports, these reached $574.5 billion to Europe and
only $179.2 billion to China. These figures included both goods and services.

“In 2018,
the U.S. exported more than three times more to the EU than to China,” Hense
said, adding that the region could therefore hit back hard against Washington.

For its
part, the EU’s trade chief Cecilia Malmstrom has said they would
rather not be in this position of introducing levies, but would do so if the
U.S. struck first.

“The rules
of international trade, which we have developed over the years hand-in-hand
with our American partners, cannot be violated without a reaction from our
side,” she said in June 2018. Since then, every time the U.S. has threatened to
impose further levies, Brussels has worked up different lists of goods to show
how it could hit back at the White House.

both the U.S. and Europe cannot afford a trade war at this stage. “While the
U.S.-China trade war is now starting to have effects on the broader health of
the economy, it has taken a while and some of the effects were balanced by a
benign economic climate,” said Fredrik Erixon, director of the think tank ECIPE.

“That is not
the case if there is a serious increase in tariffs between the U.S. and the EU
in the autumn. Both economies are slowing down, and the cyclical effect of the
tariffs is likely to be pretty strong,” he added.

Data out at
the end of July showed the euro zone — the 19-member region that shares the
euro — growing at a rate of just 0.2% in the second quarter. This was down from
a rate of 0.4% in the first quarter of the year. As a result, the European
Central Bank (ECB), which oversees monetary policy in the region, is set to
announce further stimulus after the summer.

In the U.S.,
the economy grew at an annualized rate of 2.1% in the second quarter of the
year — 1 percentage point lower than in the previous quarter — and the U.S.
Federal Reserve announced in July its first rate cut in more than a decade.
Speaking at the U.S. Senate in mid-July, Fed Chairman Jerome Powell said that
“crosscurrents, such as trade tensions and concerns about global growth, have
been weighing on economic activity and the outlook.”

Erik Jones,
professor of international political economy at Johns Hopkins University,
explained that the business models of multinational firms is in danger as a
result of a potential U.S.- EU trade war.

“Much of the
(EU-U.S.) trade takes place within firms rather than between them … (as a
result) when you impose tariffs between the U.S. and Europe, you end up raising
the prices for consumers and complicating the way goods are assembled in both
places, as in the U.S.-China case, but you also end up disrupting the
profitability of the business models for large multinationals,” he said.

“Since many,
if not most of those large multinationals are American, this is going to put a
further drag on the U.S. economy,” he added.

According to
the European statistics office, the top U.S. goods exported to Europe in 2018
were engines and motors, aircraft and associated equipment, and medicinal and
pharmaceutical products. In terms of imported goods, the U.S. bought mostly
autos from the EU as well as pharmaceutical and medical goods.

“A trade war
between the U.S. and Europe would be more challenging than a trade war between
the U.S. and China because it would weaken U.S. multinationals, reduce the size
of the markets U.S. firms can access, and create incentives for U.S. firms to
divest from their foreign assets and so unleash further foreign competition,”
Jones said in an email.

“In other
words, it would undo all the structural advantages that successive U.S.
administrations created since the end of the Second World War,” he added.

Source: cnbc.com

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