US-EU Joint Statement – Has the Trade War Ceased?

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Trade tensions between the US and EU started when Trump announced a 25% tariff on steel and a 10% levy on aluminum imports in March, and the EU failed to secure an exemption. Though the EU is a steel importer on a net basis, it exports 500 million tons of steel per year to the US. Not surprisingly, the European Union announced retaliatory tariffs effective on June 22nd on EUR2.8 billion ($3.2 billion) of US products, including agriculture, food & beverage, apparel, steel, motor vehicles and vessels.

Trump also threatens to impose a 20% tariff on all imported autos, which could cause more real damage to the EU if it is enacted. According to the EU’s internal memo, the US imported about EUR294 billion ($341 billion) of cars and car parts in 2017, EUR58 billion ($67 billion) of which came from the European Union. The total exports from the EU to the US was EUR375 billion ($433billion) and auto exports represent more than 15%.

In the hopes of reducing levies on autos and possibly broaching a limited free-trade agreement, President Trump and EU President Juncker met on July 25th. What followed was a rhetorically positive joint statement.

What’s in the Statement?
Last week, Trump and Juncker agreed to “launch a new phase” in the relationship between the United States and the European Union. Though details are lacking in the joint statement, it is at least rhetorically positive. The main points of the joint statement are as follows:

  1. To work together toward zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods;
  2. To work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans;
  3. EU wants to import more LNG (liquefied natural gas) from the US;
  4. To resolve the steel and aluminum tariff issues and retaliatory tariffs;
  5. Agreed to launch a dialogue on standards to ease trade, reduce bureaucratic obstacles and slash costs;
  6. To reform the WTO and to address unfair trading practices, including intellectual property theft, forced technology transfer, industrial subsidies, distortions created by SOEs and overcapacity.

 

What it means for US-EU relations?
It is too early to tell whether the start of this dialogue will lead to freer trade between the US and the EU, considering Trump has a history of changing course. We will continue to follow this to know if it could lead to anything meaningful or if it will be in vain, like previous trade talks. For now, we can only say it is a truce – unless one party walks away from it.

However, it does hint that an opportunity exists for the EU to benefit from free trade with the US if it leads to positive actions.

US-EU Trade Statistics
The United States is the world’s largest importer and the third largest exporter, while the EU is the second largest importer and exporter in the world. The two economies combined contribute to 33% of the world’s total imports and 27% of total exports.

The US is the largest recipient of EU exports. In 2017, a total of EUR375 billion in goods were exported to the US. The US is also the second largest importer into the EU. In 2017, a total of EUR255 billion in goods were imported from the US. The EU has had a trade surplus with the US for decades, and the trade surplus in 2017 was around EUR120 billion.

Below is a chart that shows the top 20 most-traded products with the US in 2017. The EU has the largest trade surplus in motor vehicles, medicaments, organo-inorganic related compounds, and alcoholic beverages, while the US has the largest surplus in engines and motors, as well as aircraft and associated equipment.

Who will be winners and losers if talks progress?

Remove steel and aluminum tariffs: Trump said in the joint statement that “we will resolve the steel and aluminum tariff issues and we will resolve retaliatory tariffs”. US Treasury Secretary Stephen Mnuchin further affirms that addressing steel and aluminum tariffs and counter tariffs will be covered in the first phase of the negotiation between the US and the EU. If it goes positively, it could remove the 25% tariffs on EU steel exports and 10% tariffs on aluminum exports that were previously implemented. Removing the tariffs will:

    1. Benefit EU steel and aluminum producers;
    2. Benefit Harley-Davidson and Levi’s jeans, as the retaliatory tariffs imposed by the EU will also be removed;
    3. Harm Nucor, AK Steel Holding, U.S. Steel, etc. as competitive benefits gained by US steelmakers will be partially gone

 

No extra tariffs for EU automakers: Earlier Trump threatened to impose a 20% tariff on all auto imports. The EU is one of the largest partners for US auto imports. In 2017, the US imported EUR38 billion of autos from the EU, and the net trade deficit was about EUR32 billion. If the talks lead to positive results and better trade relations between the two parties, it will definitely be good news to European automakers.

What happens if the talks fail?

Tariffs on steel and aluminum remain: If the talk fails, all implemented tariffs will still in place and Trump will possibly continue to threaten a 20% tariff on imported autos.

Threats to EU automakers: The EU is the third largest partner for US auto imports. In 2017, EUR38 billion of autos were exported to the US. If a 20% tariff were imposed and assuming demand sensitivity to price is 1, this could mean a 20% decline in auto exports, which would be quite harmful to EU automakers. Even if they start to build more factories in the US, the high labor costs there would still damage the gross margins of European auto manufacturers.

EU has the capability to impose tit-for-tat tariff retaliation: Even though the EU has a trade surplus with the US, it is not as large as what China has with the US, meaning the EU has the capability to impose tit-for-tat tariff retaliation to a very large extent. In 2017, a total of EUR375 billion in goods were exported to the US. The US is also the second largest partner for imports to the EU. In 2017, a total of EUR255 billion in goods were imported from the US. The EU has had a trade surplus with the US for the past decades, and the trade surplus in 2017 was around EUR120 billion.

The EU previously imposed retaliatory tariffs from Harleys to Levi’s to fight against US tariffs on steel and aluminum. If the tensions escalate, it’s possible that retaliatory tariffs will be imposed on agricultural products, vehicles, fossil fuels, etc.

Limited impact to GDP: Though the impact on specific industries could be significant, damage to both economies’ GDP could still be moderate. In a previous analysis, we projected the maximum direct impact from trade tariff to the US GDP at -0.12%. The steel and aluminum tariffs impose a negligible impact on the EU’s GDP as European countries were not the main exporters. If the tariffs on autos were implemented, we think the direct impact to the EU’s GDP will be around -0.27%. However, as we previously mentioned, the EU has the capability to impose tit-for-tat tariffs, and thus, hedge the negative impact on its domestic GDP caused by reduced exports to the US.

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