Last week the EU signed the world’s largest bilateral trade pact with Japan – reducing friction in the eastward flow of wine and cheese and the westward shipment of vehicles and parts – five years in the making. However, this week is another story and the EU faces the further undoing of such Trans-Atlantic trade relations as its diplomats stand-up or stand-down to Trump’s escalating trade demands. According to Donald Trump yesterday, “Tariffs are the greatest!” – unless of course they are levied against the US like the EU’s £3bn retaliatory tariffs on bourbon and bikes.
Later today, European Commission President Juncker and EU Trade Commissioner Malmstrom meet President Trump at the White House to discuss willingness to negotiate on “Tariffs, Barriers and Subsidies” and in particular the Plurilateral Sectoral Agreement concerning tariffs on automobiles and/or a bilateral zero-tariff pact on a broad range of goods. To remove any hope of a reconciliatory tone, President Trump tweeted his starting position in two revealing tweets: “Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that — and everybody’s talking! Remember, we are the ‘piggy bank’ that’s being robbed. All will be Great!” followed by “The European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade! Hope they do it, we are ready - but they won’t!”
But the US is not ready to retreat “all Tariffs, Barriers and Subsidies!”: not only its latest tariffs on aluminium and steel but ingrained ‘patriotic’ 25% duties on pick-up trucks. A successful bilateral agreement is just as unlikely as any favourable US-EU deals would also have to be applied to other international trade agreements. “Trump is still looking for capitulation from the EU on US demands rather than a compromise” says distinguished economist Eswar Prasad; but Junker is certainly not one to easily compromise. Hopefully the rapport between Junker and Trump will help prevent further deterioration in this superpowers’ friendship; but auto-manufacturers both sides of the pond are preparing for looming risks to their bottom line and markets will be listening to their take this earnings season as well as today’s meeting and of course Trump’s Twitter feed. Don’t hold your breath; and keep in mind last week’s IMF report warning that further trade war escalation would detract as much as 0.5% from global growth or about $430bn in lost GDP by 2020.