Trade War Ceasefire

Trade War Ceasefire
The European Union and US have reached a truce in the global trade war through agreements on eliminating transatlantic trade barriers for many industrial goods and on reforming the World Trade Organization (WTO). President Trump is known to have..

The European Union and the US have reached a truce in the global trade war through agreements on eliminating transatlantic trade barriers for many industrial goods and on reforming the World Trade Organization (WTO).

Background 

President Trump is known to have a protectionist outlook on trade. On the campaign trail, he promised tariffs against countries such as China, whom he blamed for loss of jobs in the US. He also said that other countries were "dumping vast amounts of steel all over the United States, which essentially is killing our steelworkers and steel companies”. 

Since taking office, Trump has withdrawn from the Trans-Pacific Partnership (TPP), and initiated the renegotiation of the North Atlantic Free Trade Agreement (NAFTA). In recent months, experts have begun sounding the alarm about an impending global trade war. These fears solidified in March, when Trump announced global import tariffs of 25% on steel and 10% on aluminium. The President cited “national security” in order to circumvent WTO commitments. 

Since then, tensions have escalated. The US has imposed tariffs worth over $150 billion; Beijing responded with $50 billion worth of tariffs. The dollar has consequently strengthened in the past few months, while Asian markets have hit a slump.

The US is highly reliant on steel imports. American steel production has fallen from 112m tons to 86.5m tons since 2000. Employment provided by the industry has fallen from 135,000 jobs to 83,600 jobs. 

After a meeting of senior EU officials, the European commission vice-president Maroš Šefčovič stated that the EU regretted the Trump’s “illegal” act. The EU finalised the list to the World Trade Organization (WTO), aiming to introduce “rebalancing” tariffs on about €2.8bn worth of US steel as well as industrial and agricultural products. 

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Analysis 

President Donald Trump and European Commission President Jean-Claude Juncker met in Washington for trade negotiations. They have announced the broad outline of an agreement designed to limit the escalation of a looming trade war. Both leaders seemed pleased with the deal with Trump dubbing it a “new phase” of relations between the two trading partners.   

Trump added that the deal would “open markets for farmers and workers, increase investment, and lead to greater prosperity in both the United States and the European Union.” 

Americans’ views of free trade agreements, which turned more negative during the 2016 presidential campaign, have improved. Increased tariffs, however, face a polarised view. About 58% of Republicans say they would be good for the country, while just 26% say such tariff increases would be bad for the country. On the other hand, only 22% of Democrats believe in the positive effects of increased tariffs.

In an ironic twist, the majority of the mid-Atlantic farmers, a large chunk of Trump’s voter base, are the worst affected by retaliatory tariffs. The Trump administration will now pay $12 billion to help US farmers through the Commodity Credit Corporation Charter Act, a Great Depression-era programme, as the escalating trade war cripples the US agricultural sector. 

Farmers in America will be relieved to know that the EU has agreed to import billions in US soybeans. Zero-tariffs on non-auto industrial goods remain an important goal for the trade partners as they work towards reducing future tariffs and renegotiate existing duties on steel and aluminium. Besides eliminating tariffs on industrial goods, the two sides agreed to begin discussions on standards and easing the trade in chemicals, pharmaceutical and medical products among others. 

The Russian counterweight to EU-US tensions may soon lose prominence as the agreement included greater LNG imports from US to EU. Dependence on Russian gas and oil has been viewed a prominent issue for the EU, especially as the Baltic Sea pipeline and Nord Stream 2 are expected to put pressure on fault lines within continental Europe. 

Daniel Yergin once proclaimed, “The starting point for energy security today, as it has always been, is diversification of supplies and sources.” Americans learned this lesson the hard way in the 1970s, and today, EU realises the importance.  

European lawmakers have been apprehensive about the negotiations. French Finance Minister Bruno Le Maire vehemently opposed negotiations with a ‘gun to the head.’ EU experts believe that the negotiations are a semi-truce and could be the foundation for larger trade agreements between the two parties. 

The news buoyed financial markets, with US stocks rising on reports of a possible deal. However, the US dollar declined against the Euro, while Asian markets rallied, in the hope for possible negotiations to reduce trade tensions between China and US. 

Counterpoint 

The US has limited ports on the East Coast to transport oil to Europe. Moreover, existing pipelines across eastern Europe reduce expensive shipping and transport costs, thus, making Russian gas around 30% cheaper than US LNG. 

Assessment 

Our assessment is that the EU will avoid engaging in greater talks for trade until the US removes tariffs on steel and aluminium and brings new terms or offers for EU members to improve trade. We believe that the move to reform the WTO may increase global skepticism about the international organisation’s scope for bias. We feel that it is a win for both parties as the US increases soybean and energy exports, while the EU leaves without any increase in tariffs and simultaneously a substitute for Russian energy imports. 

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