US-EU trade spat threatens to intensify

Trade tensions between the US and China might appear to be easing, but it is far from clear that US President Donald Trump is not about to embark on a second front in the trade wars that have marked his presidency so far.

A new bill in Congress would give Trump the ability to raise tariffs (although not to lower them). The idea behind the ‘Reciprocal Trade Act’ is to fight back against alleged high tariffs imposed on US imports. It is right to argue that the higher tariffs imposed on US cars imported into the EU are hurting trade (although the president and his allies are notably silent on the higher US tariffs on European trucks versus US trucks imported into the EU), but the president can already cut a deal with Europe that reduces tariffs, subject to congressional approval.

Enhanced US tariffs would hit the German car industry hard, with UBS suggesting that BMW, Mercedes and Volkswagen would lose around 90% of their luxury car sales in the US. These sales are vital to performance as they are high margin and thus bring in plenty of revenue.

By 17 February, the US Commerce Department is expected to report on whether car imports do pose a threat to national security. If, as seems likely, the department recommends action, then US tariffs could increase and the EU could respond kind. As with the US-China spat, both sides have pledged to work towards tariff reduction, although both have been notably reticent about solving the problem when the actual nuts and bolts of the issue are considered.

As the eurozone edges closer to recession, these tariffs would hit the German economy hard, pushing Europe’s strongest economy further towards negative growth. The effects of this would be felt across Europe. The global car industry is facing a myriad of problems, but German carmakers also have to deal with falling sales in China and the potential of a no-deal Brexit.

The question is whether the Europeans can find ways to appease Trump, now that he appears to be in a slightly more conciliatory mood. Tariff wars will end up hurting US workers in the long run, and the hope is that, with the 2020 election appearing on the horizon, the president will start to worry more about the negative impact on his polling arising from trade wars rather than the positive impact of talking tough to other nations.

Talks with Washington will begin this month, but it will take time to hammer out a solution. As Brexit looms, the EU will be under pressure to cut a deal, but it is unlikely to go quietly. As the US-China spat appears to die down, markets should brace themselves for fresh trade war volatility, this time of the trans-Atlantic kind.