March 14, 2018
The geopolitics of trade war
We noted a report in Politico of a signs of a possible detente in trade war rhetoric between the US and the EU. But we think that Trump will pull through with his steel tariffs, and that there is a more than even chance of additional tariffs on cars - even if the EU were to react moderately to the steel tariffs.
Bruegel did the maths on the impact of a 35% tariff on car imports to the US, and found a total maximum cost to the EU of €17bn, and possibly lower. All European car makers, with the exception of Fiat Chrysler, are highly exposed. Audi, Jaguar Land Rover, and Porsche have no assembly factories in the US, while Volvo, VW, Mercedes, and BMW, have US factories but are still mostly importing their cars to the US. With certain assumptions about price elasticity the study estimates a fall in demand for EU cars by some 500,000. The authors argue that the €17bn overestimates the total impact because the car makers are likely to reduce output in response.
We think that the overall economic effect will be much larger because of the pivotal role of the car industry in the EU. Reduced output in that industry will affect other EU industries, and any further trade retaliation would add to the costs.
Gideon Rachman argues that there is a relatively short path between trade wars and real wars. The first round of tariffs is not going to have a big impact on China, but this will change once Trump targets intellectual property. Rachman reminds us that Peter Navarro, Trump's chief trade adviser, has written a book called Death by China.
Natalie Nougayrède makes a broader geopolitical point. Contrary to what she used to believe, Donald Trump is really out to damage the EU - and he may use Poland as an ally to undermine European solidarity.
"Trump’s mixture of hostility and indifference to the European project, its trading power and its liberal, democratic values, is hardly news – just as his hatred for Merkel is no secret. But with the early signs of a trade war, and the growing evidence of the president’s disdain for Britain’s predicament just when transatlantic empathy was expected, we see his estrangement from historical norms in sharp focus."