June 07, 2018
How long will EU unity against Trump's trade policies hold?
The European Commission agreed that the tariffs on selected US goods would come into force in July. This is in response to Donald Trump's decision to impose tariffs on EU steel and aluminium. The Commission also activated the blocking statute in response to secondary sanctions by the US against European companies doing business in Iran. A letter, signed by EU foreign and economics ministers and addressed to Mike Pompeo and Steven Mnuchin, is calling on the US to exempt EU companies and individuals from those secondary sanctions. The letters was also signed by the German ministers, an indication that Germany remains supportive of the EU's position, at least outwardly, for now.
FAZ notes that Trump's trade policies are also under attack in the US, and that Republicans are considering legislation to curtail the president's powers in this area. But Trump has the right to veto any such legislation, and it would require an unusual degree of cross-party consensus to override such a presidential veto, not very likely to happen in an election year.
The previously announced list of goods targeted for tariffs by the EU include whiskey, jeans, and Harley-Davidson motorbikes. The total value of the trade is tiny - about €6bn - with the tariffs to be phased in in two steps.
The trigger of the blocking statute is a largely symbolic act. It prevents, in theory, EU companies from complying with US sanctions. The Commission also widened the mandate of the European Investment Bank to allow it to extend credits to Iran. But FAZ notes that the EIB is not all that keen on such a role. The EIB would also be subject to US secondary sanctions as it is an active user of US financial markets.
While the EU remains unified in its response to Trump so far, we expect to see growing divisions surfacing once Trump sets his eyes on the German car industry, which we expect to happen next year. We get a hint of the upcoming debate within the EU by Daniel Gros, who argues that the EU should not only not retaliate against US tariffs, but even accept voluntary export restrictions as Korea did. He says that EU steel producers should have formed a cartel and raise the prices of their US exports by the amount of the proposed US tariffs. This would have led to increased profits for EU producers on their US sales, and freed up capacity to sell elsewhere. Instead, the EU will now engage in retaliatory tariffs which are net negative for the EU itself. In its retaliatory measures, the EU is applying tariffs on finished products, not on intermediate inputs as the US is doing, so the EU isn't damaging itself as much as the US.
We strongly disagree with Gros who seems to mix up the interest of Germany with those of the EU. The EU has a strategic interests to preserve the multilateral trading system, and to stand up to Trump. Germany has a strategic interest to preserve its preposterous current-account surplus. As for now, the political differences are hidden to the outside world as the EU maintains a facade of unity. But if Trump decides to slap tariffs on German cars, we would expect to see the gloves come off, and Germany to defend its national interests more forcefully.