Trade Wars: European Edition

What could the consequences be if the United States takes its argument with the EU any further?

Economic News
13 Jul 2018
Trade Wars: European Edition

With the United States and China being number 1 and number 2 of the world’s biggest economies respectively, much of the trade war discourse has focused on those two countries. This is also due to the fact that the trade deficit with China was one of Trump’s key talking points during his election campaign and his recent rounds of sanctions against Beijing have shown his commitment to his older promises. However, the European Union is another important side that has been slightly neglected in this conversation. Today we would look at how things are going between the EU and the United States.

Though the trade disputes started by President Trump have to do with commerce and economics, Europe has been increasingly skeptical of the American president over other issues. Trump’s decisions to pull out of the Paris Accord on climate change, as well as the Iran nuclear deal have both happened against the advice of European leaders. This is why they have come to regard Donald Trump with distrust and relations between Europe and the United States were deteriorating even before Trump announced his tariff plans. Imposing duties on steel and aluminum imports from the European Union only made matters worse, not to mention Trump’s later statement that the States might also tax European automobiles.

The United States has the world’s largest GDP, while the European Union has the second largest when considered as one country. The EU is comprised of multiple national states, but they operate as a single market, which is why their GDP can be considered in combination. This makes the US and the EU relatively equal. Between the two entities, they trade for over 1.1 trillion USD annually, which is the most substantial trade relationship in the world. Of that amount around $629 billion are the EU’s exports to the United States, while the US exports roughly $528 billion to the European Union. As the numbers show, the United States are at a slight trade deficit with Europe, but it is still three times less the deficit they have with China. Investment between the two is also more or less even and is around 2.5 trillion USD in both directions.

Trump has repeatedly complained about Europe’s unfair treatment of trade with the United States. However, as the numbers show, the situation is not nearly as unfair as the President presents it. According to the CNN, the average tariff of US imports to the EU is around 1.9%, compared to 1.4% the other way around. Moreover, Trump has specifically mentioned the European Union’s 10% tariff on car imports from the United States, but in reality almost 90% of American exports are not subjected to it because they contain many European-made components, which makes them exempt from tariffs.

Earlier this week the leaders of many important European countries, as well as the United States, met in Brussels for a NATO summit. This was expected to be quite stressful for the reasons stated above: EU leaders were worried about Trump’s recent animosity, especially considering how poorly the G7 summit went last month. Trump reportedly wreaked havoc at the summit by refusing scheduled meetings with Romania, Azerbaijan, Georgia, and Ukraine. The last two were specifically invited to the NATO summit in order to discuss plans for inviting them into the union, but Trump was late to that meeting and then completely monopolized it with his own discussion topic, namely defense spending. According to different reports on the meeting, Trump may or may not have threatened than the United States would leave NATO if his demands were not met.

The relationship between the European Union and President Trump was already quite strained, but with the latest developments from this week it is unclear where the two stand on the issue of trade. Nevertheless, on account of how crucial the cooperation between the United States and Europe has been for the global economy, any news of further discord can have a major impact on the financial markets. We advise you to stay alert and follow the issue closely.

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