Home Analysis US-EU Trade War Ramps Up

US-EU Trade War Ramps Up

Stockholm (Ekonamik) – During the second week of April, President Trump escalated his previous threats to EU trading partners by threatening to increase tariffs on US$ 11 billion worth of EU exports to the USA. The EU then made it known it was ready to retaliate with increased tariffs on US$ 11.520 billion of US exports to the EU.

Formally speaking, at the core of the issue is a long-standing dispute at the WTO between the EU and the USA. The quarrel concerns the various forms of official support each gives to its aviation industry. The USA claims that the EU has given subsidies to Airbus – which the WTO agreed in May 2018- while the EU says that the US also supported Boeing, a case that has found some support in the WTO.

However, the heart of the problem is the same as it has been with all other USA trading partners since the 2016 election. To President Trump a trade deficit is unacceptable, even an imaginary one. The US president is a mercantilist to whom imports and loans are tantamount to other countries raiding the wealth of the USA. “Tariffs are the greatest,” he boasts. In the EU’s case, the President also has a well-documented dislike for the German auto industry, which he believes has unfairly priced out its American counterpart.

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Of course, tariffs are not “the greatest”. They are a burden that causes retaliation and which has forced Trump to subsidise US farmers hit by retaliatory tariffs from China – a policy he now wants to reverse. Unsurprisingly, the available evidence suggests that the cost of the tariffs has ultimately been passed on to US consumers. The tariff-prone policy ignores the fact that the trade deficit is a structural feature of the US and global economies.

Because the USA has a monopoly on the global supply of the reserve currency of the world – the US dollar – there is very little the USA can do about the trade deficit. The fastest way for the world to get US dollars is to lend them to the USA, which then spends it on things it does not produce, increasing its current account deficit.

“Is it bad to have a trade account deficit?” asks an article published by the Federal Reserve Bank of Saint Louis. “If this means that your economy is booming and local production cannot keep up with demand, then no. If it implies that there is a current account deficit and, hence, foreigners are investing in your country, then also no. If this means that you can have more investment without having to save more, because the rest of the world is picking up the slack, no again. If you are worried that in the future dividends will flow abroad, then yes. But that will happen only if your economy is in good shape in the first place and will be able to afford paying such dividends.”

Source: FRED

While the trade dispute is not new, the way that Trump weaponises it antagonises partners already reeling from his lacklustre support for NATO. At a time of Russian resurgence this adds another crack to an increasingly fragile global status quo.

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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