The tariff battle between Washington and Beijing is far from over, but the biggest battle for US trade hawks over the next 12 months is likely to be with Europe.
The global trade slowdown has already hit the European economy hard. Brussels has been forced to cut its growth forecasts for the eurozone to its lowest level since the peak of the financial crisis as slowdown in global car sales hit the German economic powerhouse. But Donald Trump could be about to make the situation much, much worse.
US trade representative Robert Lighthizer hinted in mid-December that the Trump administration was ready to escalate the trade dispute with Brussels. He said that the US had a “very unbalanced relationship” with the European trading bloc, citing an annual bilateral trading deficit of $180bn (£137bn).
France stirs the pot
The US slapped tariffs on imported European steel and aluminium in mid-2018 and has raised trade barriers on $7.5bn worth of EU products over a dispute about subsidies for aircraft maker Airbus, the main rival to US manufacturer Boeing. Following France’s decision to apply a digital services tax (DST) of 3% on technology companies, further tariffs are likely.
The language used by Paris when it introduced the DST has really ruffled feathers in Washington – and the Office of the US Trade Representative has been clear that the US sees as a direct attack on US businesses by a protectionist EU.
“Statements by French officials responsible for proposing and enacting the French DST show that the law deliberately targets US companies,” the Office of the US Trade Representative said. “Minister of Economy and Finance Bruno Le Maire, as well as other officials and members of the French parliament, repeatedly referred to the French DST as the “GAFA tax,” which stands for Google, Apple, Facebook, and Amazon.”
Europe won’t escape
Mr Lighthizer, quite correctly, argues that the US will not get its global trade deficit down without slashing the deficit with Europe. “There are a lot of barriers to trade there, and there are a lot of other problems that we have to address. So, dealing with Europe is something that’s very important,” Mr Lighthizer told Fox News. “We’ve put tariffs in place on a variety of products, and we’re going to continue to focus on that. It’s something the president cares about.”
As a result, the possibility of a 100% levy on EU wine imports has been raised, a move that would hit French winemakers very hard. An import tariff of 25% has already been imposed on EU wine following a ruling from the World Trade Organisation (WTO) that Airbus benefited from illegal subsidies. The ruling allowed the US to legitimately raise tariffs on $7.5bn of goods imported from the continent. Any increase in tariffs to the threatened level is likely to result in many French wines not being available in the US at all.
To try and tackle this escalating conflict, the US and the EU’s top negotiators are set for a face-off in the next few weeks. Brussels new trade commissioner, Phil Hogan, said on Monday that he wants to “reset” trade relations on a number of contentious issues when he first meets Mr Lighthizer later this month.
“We agreed to meet in Washington in mid-January to discuss the long list of issues causing strain in the relationship between the EU and the US,” Mr Hogan said. “There is no point in getting into the details of resolving trade irritants unless we agree a line on a common trade agenda. I will be seeking a reset of the EU/US trade relationship on issues like tariffs on steel and aluminium and the threat of US tariffs in response to a digital tax in Europe.”
Trump and agriculture are interlinked
The main sticking point in any discussions will relate to access to European markets for US farm products. Washington says they must be included in any agreement, but Brussels is adamant that agriculture cannot be part of any concessions made. But support from Donald Trump’s agricultural base is vital for his chances of re-election for a second term in November, so attacking Europe’s protectionist farming measures is likely to feature as a significant part of his strategy to regain the Oval Office.
The Eurozone economy is likely to slow further in 2020 even without the threat of additional tariffs from the US. This would represent the third consecutive year of slowing economic growth in the bloc. The main drivers are the slowdown in the auto industry, political instability and these accelerating trade issues. As a result, Christine Lagarde, the new head of the European Central Bank (ECB), wants governments in the eurozone to release their purse strings and apply a significant fiscal stimulus. However, Germany is extremely resistant to loosening its fiscal stance.
The Schwarze Null policy, or black zero, has been enacted by Berlin for a decade. It refers to a balanced budget without any new government borrowing. This policy was rational in the aftermath of the financial crisis, as governments worldwide retrenched. But when the armoury of the ECB is being depleted and storm cloud lie ahead, it actually makes sense to ditch this policy and reflate the struggling economy.
Angela Merkel’s centre-right Christian Democrats have indicated that black zero will only be scrapped in extreme circumstances. Should Donald Trump accelerate his tariff battle with the EU, the perfect storm of economic problems facing the bloc could make a fiscal stimulus essential. On this policy, Donald Trump could help Germany reverse its course.
The above article was previously published by Charles Stanley on 6th January 2020