September 22, 2018
Finance

Trumps threats make Europe worry about unruly trading world

PARIS — A “trade war” between the U.S. and Europe, if it happens, is certain to impact the EUs ongoing economic recovery — though the direct, immediate impact of the tariffs now being bandied about may well be limited.

But what Europeans fear the most are the longer-term consequences of a U.S. administration that could decide to “play fast and loose with the current rules” of global trade, as a senior European official put it. That would be the case if the U.S. wages war on the World Trade Organization, or even passively chooses to ignore it.

If U.S. President Donald Trump decides to go ahead with tariffs on European steel and aluminum after the May 1 deadline he has set for countries to help him reduce Americas trade deficit, the EU has warned of retaliations on products such as bourbon whiskey, Harley Davidson motorcycles, and jeans, whose symbolic Americana cachet belies their economic importance.

But the risk then is a spiral of countermeasures that could end up hitting both economies.

“If were talking just about the steel and bourbon war, the impact will be limited; Europeans dont drink Mint Juleps anyway,” noted a French finance ministry official. “The worry is both the possible domino effect, and the risk of escalation.”

Some domestic production may replace imported goods, but only in a limited way.

If both sides end up levying tariffs amounting to about 10 percent on domestic imports from the other side, analysts at ING reckon that the impact would be to sap the EUs GDP growth by 0.3 percent after two years. This would speed up the deceleration in growth that most economists already predict.

The European Central Bank in its latest forecasts sees growth in the eurozone declining from 2.4 percent this year to 1.7 percent in 2020 — in case of a trade war, that could be brought down to around 1.4 percent, according to the ING estimates.

The effect of higher tariffs will be felt on EU exporters who, compared to their U.S. counterparts, tend to pass on a lower share of their increased costs to their customers. And increased costs of imported goods will translate into lower domestic demand.

Some domestic production may replace imported goods, but only in a limited way. After all, what are hard-core bourbon aficionados to do, save for swallowing the price hike or giving up on the booze?

The U.S. economy will be hurt more than Europes if a trade war is triggered | Mandel Ngan/AFP via Getty Images

Some industries, however, would be hit more than others in a full-blown trade war. Thats the case for the road vehicles industry — which booked a €36.5 billion trade surplus with the U.S. in 2016, according to Bruegel — and the drug industry, with a €16.6 billion surplus. The German car industry could be seriously hit, even though over the long term it could limit the damage by increasing its already significant manufacturing capacity in the U.S.

Global slowdown

Beyond the next two years, economists also worry about the global slowdown that higher tariffs would cause.

The U.S. economy will be hurt more than Europes if a trade war is triggered, in part because the European market accounts for a bigger share of U.S. exports (22 percent) than the U.S. does for European exports (16 percent). The tariff war in the ING scenario would hit the American economy by 0.4 percent after two years, the banks analysts say.

Then the longer-term effects will kick in.

Lower profits for exporters, big and small. Higher inflation of the kind central banks dont like because it would accompany lower growth. And as ECB President Mario Draghi pointed out in a press conference earlier this month, the impact on consumer and business confidence over the global economys future path — which would affect current growth.

Mario Draghi, president of the European Central Bank | Hannelore Foerster/Getty Images

European policymakers are also looking beyond the current skirmish with Washington and worrying about the possible consequences of the U.S. retreating either in fact or de jure from the global trade architecture.

If the U.S. attacks the WTO, ignores its rules or boycotts its institutions, a host of other countries will be tempted to decide that the multilateral body isnt of use any longer. The impact will be cushioned by the big free-trade agreements governing large areas of the world — the EU single market, for one — but trade relationships with other regions will be severely affected.

“On our side, we want that thing with Trump quickly over with and that his fickle mind will soon forget and move on to another obsession of his,” the European policymaker said. “But if hes in to destroy the WTO, theres no telling where this all will end.”

This article was updated to clarify the impact of possible tariffs on the EUs GDP.

Original Article