Is the US-EU trade war about to spiral out of control?

By
Pieter Cleppe
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Free trade is under pressure. This is not only the result of US President Donald Trump’s new tariffs, the latest of which include 25 per cent tariffs on car imports.

According to the Wall Street Journal, more and more trade barriers are being erected worldwide at a pace not seen in decades, often to beat back the flood of electric cars, steel and other manufactured goods from China. Recently, South Korea and Vietnam introduced stiff new penalties on imports of Chinese steel, Mexico has begun an antidumping probe into Chinese chemicals and plastic sheets, and Indonesia is preparing new duties on nylon used in packaging imported from China and other countries. Even Russia is attempting to stem an influx of Chinese cars.

The influential business newspaper thereby draws a comparison with the 1930s. At the time, countermeasure after countermeasure exacerbated the Great Depression.

Risky games

Trump justifies his measures by stating that trade partners levy much higher tariffs than the US and that he only wants ‘reciprocity’, suggesting that the rest of the world is actually much more protectionist than America. This is partly true. Although there is discussion about whether the EU or the US is the most protectionist, it is a fact that Europe imposes much higher tariffs than the US on agricultural goods and cars.

In the case of India, there is no discussion possible. India is much, much more protectionist than the U.S. The question is of course whether Trump’s strategy will not make things even worse.

That depends on the reaction to Trump. The United Kingdom and Mexico are not threatening countermeasures. The EU is, even though it has postponed their introduction for two weeks and it seems to be internally divided on how to react. France has for example pressed for bourbon whiskey to be removed, to avoid Trump hitting back at French alcoholic drinks. On the other hand, some EU diplomats are considering hitting US services exports, in particular Big Tech’s operations. This could all spiral out of control in a nasty way.

A different approach is tried by Vietnam. It is trying with the carrot instead of the stick, by offering Trump lower import tariffs to convince him not to carry out his plans.

Also the EU has already offered to lower import tariffs for cars from the US. Then, it must go much further, following Vietnam’s example. Given the fact that Trump is likely to link his trade negotiations with American military protection for Europe, the EU hasn’t got all that much leverage, a consequence of years of underinvestment by European governments in national defence. A more conciliatory approach is therefore to be preferred. One good sign is that the EU is reportedly identifying concessions it’s willing to make to Donald Trump’s administration in order to secure the partial removal of the US tariffs.

Obvious concessions for the EU to propose

There is a lot of low-hanging fruit for the EU in this area. First on the list should be to offer to scrap all the new protectionist measures which the EU has already decided but not yet fully implemented.

This concerns the EU’s climate tariff CBAM, the so-called ‘Climate Border Adjustment Mechanism’, whereby the EU aims to tax imports from countries that do not follow the expensive EU climate policies. European consumers would thereby pay twice: for the extra costs of the EU’s climate policy and for more expensive imports. CBAM would also create a great deal of extra bureaucracy. Its cancellation should be a no-brainer, but it is not even being discussed.

On top of that, there are many new so-called ‘non-tariff barriers’ planned by the EU which EU Commission chief Ursula von der Leyen could offer to Trump. This concerns all kinds of new bureaucratic obligations for doing business with the EU. One example is the CSDDD, a new regulatory package that requires companies to investigate whether their business partners in the supply chain respect all kinds of social and ecological standards.

Another example is the EU’s deforestation directive. This caused so much annoyance among both European trade partners and European industry that the EU decided at the end of last year to postpone the cumbersome new regulations for one year. The intention of the rules is to ensure that no products that cause deforestation are imported into the EU. Malaysia was the first country to protest against this, as the new bureaucratic burdens would hit its own palm oil industry hard, in particular smaller companies. The country finds it unfair that it is being confronted with this, despite the fact that it has managed to significantly reduce deforestation in the palm oil sector, according to NGOs. This is partly thanks to its national standard, the MSPO. A new version of this standard will be even stricter than the EU’s, but the EU nevertheless refuses to recognise the standard of its trading partner as equivalent. This in contrast to the United Kingdom,  which, partly as a result of this, gained access to the major CPTPP trade agreement.

Possible U.S. retaliation against EU non-tariff barriers

In the US, too, there is uproar against the EU’s new regulatory avalanche that is distorting transatlantic trade. The American paper industry has already asked for Trump to force the EU to declare America ‘deforestation-free’. Republican Congressman Andy Barr warned the EU about its “regulation factory”, vowing: “An America first agenda will animate ferocious opposition to a European Union that attempts to impose their costly, burdensome regulations on American firms.”

Furthermore there is Howard Lutnick, the US Secretary of Commerce, who has already announced that the U.S. may use “trade instruments” in retaliation against EU regulations hindering American companies.

It is well known that Donald Trump is giving protectionism a major boost worldwide, but what is less well known is that the EU has also played a pretty negative role here in recent years. Ironically, the EU can now partly make up for this, thanks to Trump.

 

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