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US | Europe | Economy

Heading Towards Rising US-EU Trade Tensions?

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The US Trade Representative (USTR) is expected to implement tariffs on US$7.5bn worth of EU products starting on October 18, following the World Trade Organization’s (WTO) ruling in favour of US.

 

The current tariff list includes 10% on large commercial aircraft from France, Germany, Spain and UK (worth ~$3.5bn in 2018), 25% on certain food products (~$3.2bn with beverages, spirits and vinegar the main affected), and 25% on capital goods (mostly agriculture and construction machinery).

 

Opening the door to potential escalation. Given the WTO had authorized up to 100% tariffs on affected products, there appears to be room for escalation. While the USTR could be cognizant of the potential impact to supply chains thus levying a relatively low 10% tariffs on aircrafts, alternatively the tariffs may potentially be used as leverage in EU-negotiations. This is especially so given a similar WTO ruling on Boeing subsidies could authorize the EU to impose tariffs on the US, though such a decision is not expected before mid-2020.

 

Citi analysts still see a limited trade deal on the cards this year, however rising US-EU trade tensions are also likely given other potential upcoming catalysts. Second stage negotiations are likely to see agriculture and others in discussion, while a decision on auto tariffs is expected by 13 November.

 

 

 

 

US-EU trade turbulence in context. The US trade deficit with the EU ($151.4bn in 2017) is its second largest, only after China. US auto and parts imports accounted for around 1.8% of US GDP in 2017.

 

The EU is the world’s second largest car producer (~17mln in 2017), after China (~24mln), with one in three cars made in Germany. Around one-third of EU-manufactured cars are exported, and the US is by far the largest destination market for EU cars, both in terms of units and value (~29% share). While the direct impact of any potential tariffs on autos and/or auto parts may be moderate, the spillovers through supply chains and confidence could amplify the effects.

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