Until now, American Presidents have been content to operate within the existing rules-based trade order. In 2006 the U.S. complained to the World Trade Organization that Airbus, the European airplane manufacturer, had received $22 billion in illegal subsidies. Successive rulings and rejections of EU appeals resulted in a finding in favor of the U.S. A dozen years after the complaint was filed. In May of last year the WTO authorized the U.S. to impose tariffs on EU exports to mitigate the violations. Last week Donald Trump, the third of the Presidents to preside over this complaint, announced that tariffs would be imposed on $11.2 billion in imports of European wine, cheese, helicopters and aeroplanes although the exact amount to which it is entitled has not been determined by the WTO, who will not be rushed into any decisions. “US threat of $11bn EU tariffs increases tension,” headlined the Financial Times, as if America’s reckless president was starting another unprovoked trade war. The Trump administration insists that these tariffs are not part of any trade war, but are merely a specific reaction to the Airbus provocation.
Items to be tariffed will include wines and cheeses, perfectly suitable for this purpose. They are goods for which American consumers have substitutes, and therefore can easily avoid the higher, tariff-inclusive cost of French wares. French wines are undoubtedly excellent, but at a blind tasting, the so-called 1976 Judgment of Paris, French judges were dismayed to find to find that they had preferred California chardonnays and cabernet sauvignons over French products. And Wisconsin cheeses are not to be sniffed at.
Meanwhile, since production of these items cannot be rolled back quickly, the surpluses created by lost U.S. sales will depress the prices French farmers can charge in other markets. One can imagine Trump, known to stew forever over the slightest insult, recalling how French president Emmanuel Macron humiliated him during ceremonies in commemoration of the armistice that ended the fighting in World War I. And muttering “Take that, Macron.”
No one doubts that Trump is gearing up to launch a tariff battle with the EU. For one thing, he is set to sign a deal ending the trade battle with China, and would not be fighting a two-front war should he take on Europe which, he tweeted last week, “has taken advantage of the U.S. on trade for many years. It will soon stop.”
Having settled with China, Trump will need a new enemy. The man who found Canadian steel a threat to U.S. national security, dozens of his appointees incompetent and a threat to his re-election, and any achievement by any of his 44 predecessors a threat to his self-esteem, thrives on the animosity of allies, former colleagues, and enemies. Europe is an ideal candidate for Trump’s next target. It protects its inefficient farmers, robbing pro-Trump U.S. farmers of markets, it reportedly intends to stall current negotiations until Trump is back in his Tower, and its tariffs on American autos are four times the rate America levies on imported cars. If the EU negotiators think they can use jaw jaw to prevent or delay war war, (to borrow Harold Macmillan’s take-off on Churchill’s “Meeting jaw to jaw is better than war”), they are misreading the President.
No WTO pace for him. His weapon of choice is a declaration that EU imports are a threat to national security. It is going on a year since the President agreed with EC president Jean-Claude Juncker to hold off on tariffs while negotiations proceeded. Trump is not famous for his patience. His is a quick twitter finger.
Yes, the EU will retaliate on the grounds that Boeing also receives subsidies. Its hit-list includes frozen cod and salmon, plums, mangoes, pears, and airplanes, tables for casino games. But in a tit-for-tat battle the EU is by far the weaker party.
The EU is due today to endorse the start of trade talks. So long as it insists that agricultural products be excluded, they will go nowhere. And Macron will insist that his farmers remain protected – he is willing to fight to the last German car worker on behalf of French farmers.
- Its unemployment rate is almost twice that of the U.S.,
- Its banks have yet to shore up their balance sheets,
- Its over-taxed citizens are easy prey for populist parties,
- It is about to lose an important member,
- Its economy is stalled while America’s is growing, and
- It has the most to lose: EU exports to America exceed imports from the U.S. by about $100 billion annually, $150 billion in goods alone, ignoring our surplus in services, which Trump chooses to do.
The biggest loser in the coming war, to be played by Trump’s rules, will be Germany, which ran a $55 billion trade surplus with the U.S. last year according to data seen by Reuters. The U.S. is the largest export market for the German auto industry, which employs 840,000 workers.
“Trump seems to have a real problem with German cars,” Juergen Pieper, an analyst at Frankfurt-based Bankhaus Metzler told the trade press. True. Trump complains that he sees lots of German cars on America’s streets, but no American cars when he visits Germany. German officials tell him that gasoline is twice as expensive — $5 per gallon — in their country as in the U.S., making fuel-guzzling American cars an unattractive proposition for German consumers; Trump blames the absence of made-in-America vehicles on high EU tariffs. Perhaps the Germans should consider an autobahn version of a Potemkin Village when Trump next visits.
The EU estimates that the 25% tariff that Trump says he is considering would add about €10,000 ($11,300) to the price of a car made in the EU, and the Munich-based IFO Institute that such a tariff could halve exports to the U.S. With Germany’s economy already heading for zero-to-1% growth, the effect might be to tip it into recession.
Britain’s Jaguar Land Rover (JLR) would also be hurt. About 30% of the company’s sales are made in the U.S. If tariff-induced price increases cut into those sales by the 50% projected for German cars, the proportionate effect on JLR employment would be a loss of almost 5,000 jobs, harbinger of its fate when the likely Brexit deal allows the EU to retain control over UK tariff rates and raise or lower them with no reference to the impact on Great Britain.
Trump demonstrates his ignorance of the economics of trade by focusing on bilateral trade deficits. But he demonstrates his New York street smarts by selecting opponents who are relatively weak, as China was when he launched a battle to end its predatory trade practices. Now it’s Europe’s turn.