The U.S. has given a “final” 30-day extension of the exemption granted to the EU for section 232 duties – those justified by the effect of imports on national security – of 25% on steel and 10% on aluminum. Should this final negotiation window pass without settlement there is a strong likelihood of WTO-based retaliation from the EU, which has already drawn up two target lists of U.S. goods that will be subject to higher tariffs in response. The broader risk of trade tensions spiraling from skirmish to conflict remains.
We lost $151 billion with the European Union last year. $151 billion.
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The EU’s initial response is likely to focus on its ‘Part A’ list which includes U.S. products worth around €2.8 billion, a reciprocal amount equivalent to the loss of metals exports to the U.S. from tariff imposition. The list includes foodstuffs (rice, sweetcorn, cranberries, orange juice, and whisky), clothing and metal products. The EU is likely to implement these within months of any exemption expiring, on the basis that, in its view, the U.S.’s justification for its tariffs on steel and aluminum is not a valid use of the General Agreement on Tariffs and Trade (GATT) Article XXI national security exception.
The Part B list – estimated to cover another €3.6 billion’s worth of goods – would come into play after three years or if a WTO Panel rule the U.S. tariff’s invalid and the Trump administration refused to amend them. It is important to understand that WTO rules on retaliation are about reciprocity, rather than retaliation – allowing countries to counter-balance the financial cost of tariffs imposed on them, but not to apply “punishment” – so these counter-measures should not in themselves be seen as an act of escalation in this dispute. That said, it remains to be seen whether the U.S. would accept that.
As the quote above from President Trump suggests, the broader issue is the view taken by the current administration that current trade agreements and practices are not beneficial for the U.S. A visible trade deficit of $823 billion over the last 12 months is taken as prima facie evidence of this. While the deficit with China is the largest single element of this trade imbalance, the U.S. deficit with the EU as a whole ranks second and is greater in value than the equally contentious deficit with Mexico (see chart 1). Within the EU, Germany (US$66 billion), Italy (US$33 billion) and France (US$15 billion) are the three largest deficit contributors. In contrast, the U.S. has a small visible trade surplus of US$4.3 billion with the U.K. (see chart 2).