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The EU’s global trade partnerships – A trade war buffer

The EU’s global trade partnerships – A trade war buffer

In May, when Donald Trump hit the Eurozone with punitive steel and aluminium tariffs, the EU got its first taste of how a full-scale, transatlantic trade war might play out. With the US flexing their trading muscles, the EU responded with tariffs on items like bourbon, blue jeans and US steel.

Trade wars are by nature retaliatory, one set of tariffs met with a retaliatory set and so on.

The US economy is on course for another strong showing in 2018. US real GDP grew by an annualised 4.1% during the second quarter. Final sales surged as inventories were drawn down sharply. Some economists feel that part of the second quarter’s strength came from efforts to produce and ship products ahead of retaliatory tariffs. That could be a case of ‘post hoc, ergo propter hoc’ based revisionist history – after this, therefore because of this.

Trump and trade deficit

The US president’s push to impose tariffs on the EU, China and other countries is aimed at stopping what he views as unfair trade practices. His motivation behind these moves is to encourage American consumers and businesses to buy and sell more goods made at home.

Trump points to the gap between US imports and exports – the trade deficit – as justification for his policies. By contrast, many economists believe a trade deficit isn’t necessarily a bad thing, reflecting a strong economy and currency.

Tariffs and confidence

The impact of these opening salvos was felt on both sides of the Atlantic. The ‘Manufacturing Purchasing Managers’ Index (PMI) serves as a helpful gauge of the US economy. A survey of manufacturing firms across the US, its results for June showed the lengthiest delays for supplies reaching factory production lines since 2007.

A similar survey of eurozone manufacturers showed economic activity in June had dropped to the lowest level for 18 months, the worst of the slowdown coming in Germany, France and Greece.

As economic growth is cyclical, it is a case of ‘when’ rather than ‘if’ the slow down will occur. Only time will tell if the tariffs caused the slowdown or had we reached a tipping point in the economic cycle.

Friends again

Both sides met at the end of July where Trump and European Commission chief Jean-Claude Juncker reached an agreement to work towards zero tariffs. Juncker said there would be no further tariffs, including on cars, while the two sides negotiate. Trump has repeatedly expressed frustration with the EU’s 10 per cent tariff on imported US cars – the US tariff on European cars is only 2.5%. The US tariffs on European steel and aluminium would also be looked at.

So, after months of tension, an all-out trade war has been averted; or so it would seem.

A new NAFTA

As the US reaches the final stages of renegotiating the North American Free Trade Agreement (NAFTA) with Canada (a deal with Mexico has already been struck) some observers believe the truce with the EU may be subject to revision. With new data this week showing the U.S. trade deficit in July widening at its fastest rate since 2015, some economists believe Trump may harden his protectionist stance on US/EU trade.

The US president has begun to harden his rhetoric in recent weeks. In an interview with Bloomberg, Trump called the EU’s proposal to scrap auto tariffs as “simply not good enough”, a change in tone from July’s Juncker meeting.

Can you win a trade war?

According to an analysis by ING, if both trading blocs levy an additional 10% tax on imports the impact on the US economy would be a drop of -0.4% in GDP after two years while the EU will see damage to GDP amounting to -0.3%. Not much to worry about here you may say.

While the impact on GDP is quite small, the secondary effects of an escalating trade war could be more precipitous. Lower profit margins for exporters may impact on domestic investments and higher inflation due to tariffs will have a negative real wage growth.

However, thanks to globalisation and the rise of emerging economies to developed levels, there are plenty of trade partners to make the world go around.

A world beyond the western hemisphere

Trump’s domination of the headlines can lead to a loss of perspective. A meeting in August between trade officials from Canada, Japan, South Korea and the EU pledging closer economic ties is a reminder that there is literally a world of options for trade partners.

The EU’s strengthening trade relations with Japan serve as a good example. EU firms export over €58bn in goods and €28bn in services to Japan every year.

In July, the EU’s Jean-Claude Juncker and Donald Tusk, and Japanese Prime Minister Shinzo Abe, signed the EU-Japan Economic Partnership Agreement (EPA). The trade agreement is the biggest ever negotiated by the EU creating an open trade zone of over 600 million people. It’s hugely significant, with the two partners together representing nearly a third of the world’s GDP.

The agreement removes the majority of the €1 billion of duties paid annually by EU companies exporting to Japan. It will also open the Japanese market of 127 million consumers to EU agricultural exports while also opening up service markets, in particular financial services, e-commerce, telecommunications and transport.

Concerning data protection, the EU and Japan have agreed to recognise each other’s systems as ‘equivalent’, allowing data to flow safely between the EU and Japan. This will enable major tech companies, many with EU headquarters here in Ireland, to more easily work with Japan’s hugely innovative tech sector.

G’day opportunity – increasing EU trade down under

The EU has clearly embraced exploring all options.

In May, it launched negotiations for a comprehensive trade agreement with Australia. As its second-biggest trade partner, bilateral trade risen steadily in recent years, reaching almost €48bn in 2017 with trade in services adding an additional €27bn.

The advantages for both parties are clear. The EU will gain an important launch pad for businesses into Asia, while Australia can mitigate its growing dependency on its trade with China.

EU trade with China

There can be little doubt that trade between the EU and China will continue to increase.

The EU is China’s biggest trading partner and its second-largest export market. Chinese foreign direct investment into Europe hit $12 billion in the first half of 2018, while Chinese investment into the US fell 92% over the same period, to just $2 billion.

Conclusion

If we consider trade in truly global terms, it becomes clear that one trading blocs protectionism can be another’s opportunity.

Globalisation has changed the nature of trade, it’s now more fluid than ever and geographical borders have become less significant.

The EU’s recognition of this can offset any negative impacts of a trade war with another region and ensure the increasing prosperity for the eurozone.