US fires opening shot in global trade war
The US opened the door to a global trade war this week by putting into effect punitive tariffs on steel & aluminium imports mainly from China, but also Russia and a number of smaller countries.
Key allies in Europe, Asia & Latin America are so far exempt from the tariffs but the risk is high that the measures will eventually spread across the global as the US increases its steel production, thus adding to global oversupply. The White House also announced further punitive tariffs on Chinese exports that will no doubt be met by a commensurate response from Beijing should they go ahead.
The face-saving delay of implementation of tariffs against Europe was the only reasonable option for all sides to avoid a quickly escalating crisis that risks crippling global growth. However, like the Chinese the EU Commission stands ready to mount a robust defence by threatening safeguard measures against steel and aluminium imports, a WTO challenge and most importantly compensating tariffs on certain US goods.
However, while sound on paper, such confrontation risks setting off a spiral of further US retaliation, possibly on German car exports, that will hit EU economies with their high proportion of value-added exports much harder than the US. While there may well be another period of calm in transatlantic trade relations, the dispute is far from over.
The rising threat of Democrat control of the House after mid-term elections, which betting companies quote as high as 68% after last week’s by-election in Pennsylvania, and possible impeachment procedures further raises the stakes for the Presidency in the coming months, making erratic decisions more likely.
While the timing of the US move on tariffs is in part motivated by the White House’s fear of defeat for Republicans in the upcoming mid-term elections, there are good reasons to believe that protectionist bias will stay for as long as the administration remains in office.
The policy reflects a long-standing belief by the President and his advisors that “unfair” trade practices by other countries (and not macroeconomic imbalances) are to blame for the US’ chronic current account deficit and long-term decline of its manufacturing sector. While China may be the main target for now, other manufacturers such as Mexico or highly competitive European exporters such as Germany are also in the crosshairs.
Faced with the ongoing threat of a negative spiral, EU governments have every incentive to stick together and keep lobbying the US government to delay tariffs by underlining the common goal of reducing Chinese dumping, the threat from Russia & Iran and by increasing European defence efforts.
At the micro level, State politicians will also be receptive to push-back in view of the damaging effects tariffs will have on certain US regions, especially in agriculture and certain industries, e.g. car exports from German owned plants in Virginia.
Meanwhile, the EU Commission, which has ultimate authority over all aspects of trade policy across the EU, will want to keep its options on the table, incl. a rigorous WTO challenge over the use of “national security” and a carefully phased introduction of retaliatory measures, even if to the detriment of its exporting members.
Jan is BGA’s Founder and CEO combining a background in finance, foreign policy and international public affairs. He advises clients on complex investment situations and transactions and has a strong transatlantic focus.
He has worked at Goldman Sachs, the German Council on Foreign Relations, the European Group for Investor Protection, Bohnen Kallmorgen & Partner and the global public affairs firm Interel Group. Jan is also founder & chairman of the non-profit think tank Atlantic Initiative and a regular speaker at international conferences and universities. See him in action
Before Fidelity, he worked for Deutsche Bank in London and as Deputy Head of Credit Risk for the BIS in Basel, where he advised central banks and regulators on bank capital and risk management.