BGA Cable: On the Brink of a Trade War

New tariffs further the official disruption of the international trade order

 

The Situation

Friends and foes alike have found themselves in the crosshairs of US trade tariffs. They have responded by fighting back through retaliatory measures as the European Union, China, Canada, Mexico, and Russia in particular, have either issued counter tariffs or have plans to fight fire with fire. As a result, consumers will see a spike in the prices of everyday goods and businesses have begun to see a disruption in supply chains.

  • Today a fresh round of tariffs on goods worth roughly $34 billion will be imposed by the US on China after threatening an additional $200 billion in June. China is expected to immediately respond with counter tariffs of equal value.
  • Previously, Trump verbally threatened the EU with 20 percent tariffs (the final tally may reach 25 percent) on automobiles assembled there.
  • US Ambassador to Germany Ricard Grenell recently met with the heads of BMW, Daimler, Dieter Zetsche, Harald Krüger, Volkswagen and others to offer a deal to abolish tariffs in US-EU auto trade. Despite some skepticism about the deal, it was well received by the EU business leaders and at least keeps the two sides talking.
  • Mexico and Canada are still reeling from the 25 percent and 10 percent tariffs on steel and aluminum, respectively, in the middle of ongoing contentious NAFTA negotiations.

Countermeasures  

US products targeted by Canada range from maple syrup to boats totaling $12 billion. Meanwhile the EU is planning to target $300 billion in US goods. China is proposing countermeasures similar to the $34 billion imposed by the US, targeting US farm products, with soybeans, sorghum, and beef hit the hardest. The EU has been most vocal that the White House’s use of national security as a justification for the tariffs breaks international law and run counter to WTO principles.

Leaked US bill gives window into Trump’s thinking

  • The bill, entitled “The United States Fair and Reciprocal Tariff Act”, was personally ordered by US President Donald Trump and would give him unprecedented, far reaching powers to raise tariffs at will, in conflict with international rules and without requiring congressional approval.
  • The legislation does not officially call for the removal of the US from the WTO but would give the president authority to ignore some of its key principles, including the Most Favored Nation (MFN) principle and bound tariff rates.
  • The leaked legislation draft underscores the president’s single-handed efforts to disrupt the current global trade infrastructure and provides a window into the extremes of his unilateral trade approach.

Impact for investors

  • The $34 billion in Chinese goods targeted by the US will hurt key Chinese industries (technology, intellectual property, and telecommunications), but have little effect on its actual economy as this round of US tariffs make up only 0.4 percent of it.
  • Beijing can simply sell the goods at lower prices to other willing buyers outside the US. The US will continue to target China’s “Made in 2025” industries like computer microchip manufacturing and advanced aircrafts.
  • Industries ranging from German autos to Chinese electronics to US agriculture and manufacturing are facing higher costs and further disruption in cross-border supply chains.
  • The announcement by Harley Davidson that it was going to shift portions of its operations to the EU to elude US tariffs will cost the company nearly $100 million a year and is only one example of the many multinationals rethinking their strategic plans.
  • Tariff threats on EU automakers will lead BMW to reduce its US investment and cut jobs at its plant in South Carolina, a state that Trump won by 55 percent. The plant is BMW’s largest and ships over 70 percent of its production to export markets from its Greenville/Spartanburg location.
  • Tariffs on European autos would have a reverse negative effect, hitting the US GDP to the tune of roughly $15 billion and raising prices to $5,000-$6,000 per vehicle due to the interconnectedness of the car manufacturing industry.
  • The latter part of 2018 will be tough for investors dealing with the constantly changing tariff environment as inflation will rise and constant stock-sell offs are likely to continue with new tariffs announcements.
  • Over the next two years, the ongoing trade conflict could bring a worst-case scenario that would see global growth down to well below 2% as consumer confidence and trade volumes sharply decrease.

Key Dates

Today: US tariffs on China worth $34 billion set to begin, followed by China’s countermeasures

July 11-12: NATO Summit in Brussels

July 16: Trump – Putin summit in Helsinki 

July 19 -20: EU officials to participate in a public hearing on trade organized by the US Department of Commerce

End of July: EU Commission President Jean Claude Juncker to visit with US President Donald Trump in Washington to discuss the global trade dispute

Q3/Q4 2018: WTO dispute settlement panel is expected to decide on China’s “market economy” status case

BGA Expert

Todd Williamson

Todd Williamson

New York

Todd's Bio
Todd is Vice President, Public Affairs at SKDKnickerbocker in New York. From 2016-2018, he was a Senior Consultant at BGA in Berlin where he focused on global trade, FDI, financial regulatory policy and reputational risk. Prior to BGA, he was a Robert Bosch Fellow at the Global Public Policy Institute (GPPi).

From 2011-2015 he was a member of the global government relations & public policy team at JPMorgan Chase & Co. and from 2009 – 2011, he was a presidential appointee in the Obama administration with the Office of Congressional Relations (OCR) and the Rural Development Agency at the US Department of Agriculture (USDA). During this period, he also worked on the White House Council on Automotive Communities and Workers.  On Capitol Hill, Todd served as a legislative assistant in the office of Congressman Hank Johnson (GA-4) covering financial services, education, and budget policy.

Education
He received his MA in Communication, Culture & Technology from Georgetown University and his BA from the Scripps Howard School of Journalism and Communications at Hampton University.

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