What happened?
Back in June, Donald Trump decided to address his perceived imbalance on trade relations between the US and other countries. He imposed 25% tariffs on steel and 10% on aluminium imported from Canada, Mexico and the European Union. This was in line with his “America First” policies, as he sought to protect domestic production and to retaliate against other tariffs that might be imposed on US goods.
The EU reacted by imposing similar, although leaner, tariffs on US goods. While, according to the European Commission’s website, US tariffs concern about 6.4 billion euros’ worth of trade, the European proposal concerned 2.8 billion euros, with another 3.6 in store, bringing the total to an even 6.4 billion euros in trade each. Wanting to avoid a trade war with its biggest economic partner, a scenario which would only damage both economies, the Commission was defending EU interests with caution.
Cecilia Malmström, the EU Commissioner for Trade, declared that “this is a measured and proportionate response to the unilateral and illegal decision taken by the United States to impose tariffs on European steel and aluminium exports.” She added: “What’s more, the EU’s reaction is fully in line with international trade law. We regret that the United States left us with no other option than to safeguard EU interests.” The EU then declared these tariffs to the World Trade Organisation, which allows for such retaliatory measures in case a country increases their tariffs.
Then, on July 15th, Donald Trump called the EU, along with Russia and China, a “foe” in trade, before adding: “but that doesn’t mean they’re bad”. The comment caused an uproar but it is, in all honesty and despite Trump’s often simplistic view of the world, accurate. The US and the EU are partners but, just as they cooperate, they compete too. And in that sense, all countries are both partners and foes to each other.
Wednesday, July 25th, Jean-Claude Juncker met with Trump in order to avoid the escalation of the burgeoning trade war. The result was a joint statement which can only be called a success, considering where the relationship was a few weeks prior. The tariffs are still in place as we speak but we got a declaration of intention. The US agreed to drop all tariffs on manufactured goods except cars, and the EU agreed to buy more soy beans and Liquefied Natural Gas (LNG). Even more than that, the two powers agreed to tackle a bigger issue: the reform of the World Trade Organisation (WTO). Provided the US president doesn’t change his mind, there are some very good news ahead.
Why is it a big deal?
Tariffs are a big deal. Let’s take steel as an example: any foreign producer must, in this case, must pay one quarter extra for in order to access the US market, effectively making their product more expensive than that produced locally. This is also seen with cars. Both the US and Europe are big car manufacturers. In order to protect its market, the US imposes a 25% tariff on foreign trucks and a 2.5 - 4% tariff on passenger vehicles. The EU also has a 10% tariff on car imports, which is what Trump was criticising.
Trade wars increasingly set tariffs on more and more goods, trying to damage your “foe’s” economy. The problem is that your foe also increases tariffs on the goods you are trying to sell, so it damages your economy just as much. And neither is better off by the end of it.
Hence why free trade agreements exist and how the World Trade Organisation came into being. It acts as a referee of sorts in the realm of international trade and encourages free trade practices among its members.
Ramifications
Tariffs and free trade are one way to understand the situation but there are a number of variables which affect these decisions. Here, we suggest three possibilities:
1) It seems like the EU caved in: after all, it got the retraction of the trade tariffs but it had to promise to buy soy and LNG from the US. And yet, some say the EU got the US to lift trade tariffs by giving them something they wanted to give anyway. LNG? The EU is seeking to diversify its energy resources in order to depend less on Russia. Soybeans? The EU doesn’t have any tariffs on soy and its main import was coming from Brazil until now, where prices rose recently. Working towards “zero tariffs, zero non-tariff barriers, and zero subsidies”, as president Trump said? Not an easy pill to swallow, since the US subsidises coal, steel and aluminium and the EU subsidises agricultural products. But this could be the comeback of TTIP (or TAFTA, the trans-Atlantic free trade agreement) that got shot down in the interregnum between the Obama and Trump administrations. A free trade agreement between the world’s two largest superpowers spells one word: h.u.g.e.
2) One of the reasons Trump might have caved in on trade tariffs is soybeans. Having started a trade war with China as well, American farmers were hit hard by his measures. So much so that the Trump administration had to promise a “temporary measure” to subsidise soy farmers with a whopping 12 billion USD. A temporary measure, they say, but one that put him under a lot of heat domestically. Promising American voters that the EU would buy soybeans made Trump look like he was fixing the problem, effectively making the media heat go away and buying him some time to address the trade war with China.
3) While the US and EU were starting a trade war, there was another frenemy on the table: China. Donald Trump often criticised the country during his 2016 campaign and the EU is aware of Beijing’s ever-rising power. Both the EU and the US do a lot of business with China but both are also afraid of it. And China doesn’t play by the rules, with its government-backed companies and artificially-set currency. Despite China being a WTO member, other economies were turning a blind eye to these schemes because they wanted to do business with the red giant. The biggest announcement from Wednesday’s joint statement is arguably that the US and EU want to change the rules by which the referee plays, in order bring China to play to their rules. Juncker traveled to Beijing ahead of his meeting with Trump, in order not to come empty-handed and it seems that the Chinese might go with the change. Why? We don’t know yet.
Conclusion
To go back to our initial questions: what happened and are we out of the woods yet? What happened was not the effective lift of the trade tariffs yet but the declaration of intention to do so. It remains to be seen if the two leaders follow through. What’s more, we’re definitely not back to the status quo either, as the intention of going forward with frictionless trade between the EU and US and the planned reform of the WTO are HUGE news! The effect this might have on our partnership and on Western countries’ relationship with China are potentially titanic. Things might still change, we’ll have to wait and see how all this plays out. But there are two things we can be certain of: Juncker’s team, either through luck or through sheer competence, made a great deal. And, for once, the future is looking bright.
Sources
The Guardian: Trump and EU officials agree to work toward “zero-tariff” deal
The Guardian: Trump administration to provide $12bn in aid to farmers hurt by tariffs
Euronews: What did Trump and Juncker agree on trade?
NBC News: What’s included in the EU list of tit-for-tat tariffs? Bikes, bourbon, and fishing boats
European Commission: EU-US Trade: European Commission endorses rebalancing duties on US products
Quartz: The EU de-escalated a trade war with the US by promising to do things it wanted to do anyway
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