As Jean-Claude Juncker, president of the European Commission, prepares to meet Donald Trump, US president, on Wednesday in an attempt to de-escalate tensions on tariffs, the US and EU risk sliding into an ever more damaging trade war.
The first round is already under way, with 25 per cent tariffs on steel imports to the US and a 10 per cent tariff on aluminium. The EU responded with tariffs on $3.2bn of iconic US goods, including Bourbon whiskey, peanut butter, motorcycles and blue jeans.
Round two is imminent. Mr Trump has threatened to impose a 25 per cent tariff on imported vehicles using the justification of protecting US national security. This would affect almost $50bn of European exports, with Germany hardest hit. The EU is drawing up a new list of US products to tax in retaliation.
But despite the threats and bad blood, both sides are dangling possible new trade deals in front of each other.
Does the US have a strong case against EU trading practices?
No. The EU and US have very similar and low levels of tariffs on goods. Even though some trade is deterred by specific high tariffs on both sides of the Atlantic, the average weighted tariffs applied by the EU on US goods were 3 per cent in 2015, a little lower than the US equivalent of 3.3 per cent in the same year.
Mr Trump’s complaint in a CNBC interview last week, that “for years we have been losing $150bn with the European Union and they are making money easy”, relates to the US bilateral goods trade deficit with the EU. This is a product of a healthier US economy and a surplus in services rather than unfair European trade practices.
When Steven Mnuchin, US Treasury secretary, called at the G20 meeting in Buenos Aires last weekend for trade on a “fair and reciprocal” basis, economists would say this already applies to transatlantic commerce.
Is there a potential US-EU deal on the table?
Yes, if you take politicians’ statements at face value. At the G20, Mr Mnuchin said: “If Europe believes in free trade, we’re ready to sign a free-trade agreement.” He insisted that any deal required action on tariffs, non-tariff barriers and subsidies. “It has to be all three issues,” he said.
European finance ministers object to what they see as the US bullying tactic of making trade overtures “with a gun to the head”, as Bruno Le Maire, French finance minister put it. But European officials are mostly attempting to defuse the rhetoric and seek to avoid any escalation in the trade war.
Pierre Moscovici, European economics and financial affairs commissioner, said: “We were in mutual listening mode and I hope that this is the beginning of something.”
Meanwhile, Europe has floated an idea for all leading economies to drop car tariffs globally to zero.
Is talk of a trade deal mostly for public consumption?
Sadly, yes. The signs are that Mr Trump does not want a deal but instead talks of now being a perfect time to have a trade war because the stock market and US economy are riding high. “We’re playing with the bank’s money, right? We’re [the stock market] up almost 40 per cent,” he said last week.
Talk of a trade deal between the US and the EU on the basis of tariffs, non-tariff barriers and subsidies is little short of a call to reopen the Transatlantic Trade and Investment Partnership (TTIP) talks, which were put on hold two years ago.
But even before Mr Trump brought an aggressive new trade stance to the White House, TTIP had hit the rocks because neither side was willing to make the necessary compromises.
“The EU and US tried to bunch together all the trade disputes they had been having for decades [in the TTIP negotiations], but the differences in regulatory culture, different levels of precaution and desire for protection in different sectors proved too high a hurdle,” said Sam Lowe, senior research fellow at the Centre for European Reform.
How bad could a US-EU trade war become?
It is very uncertain but no one would be a winner. The direct costs to each side purely from tariffs tend to be small, but the uncertainty will generate knock-on effects from loss of confidence and disrupted supply chains.
The IMF has estimated that if a trade war hit confidence, it could knock 0.5 per cent off the global growth rate. Meanwhile, Mark Carney, Bank of England governor, cited BoE estimates suggesting a full-blown trade war could knock more than 2 per cent off global growth rates if 10 per cent tariffs were applied widely. There would also be knock-on effects for confidence, he said, citing Britain’s soggy economy since the Brexit vote.
“The experience of Brexit underscores that the impact of a global trade war will be greater the more business confidence is affected, the more financial conditions tighten and — most fundamentally — the more permanent the loss of openness is expected to be,” Mr Carney said.