Washington Insider: Europe and Administration Tariffs

Amid press reports that the U.S.-China talks are close to bearing fruit, the New York Times is reporting that European studies are suggesting that tariffs on Europeans are not having as much impact as formerly expected. For example, President Trump’s trade war was supposed to make Europeans feel so much pain they would beg for mercy at the negotiating table, NYT says. “But it’s not working very well, according to a new study by the European Central Bank.” Almost a year after the White House imposed tariffs on European steel and aluminum, the actual damage to European exports has been surprisingly mild. Some industries, notably manufacturers of heavy equipment, may have even profited “because the White House imposed a broader array of tariffs on Chinese products, making competing European goods less expensive by comparison and allowing them to gain market share,” the Times says. The tariffs “pose only a modest adverse risk to the global and euro area outlooks,” the economists at the European Central Bank reported. The new study, which comes as Europe and the United States prepare to begin high-level trade talks, reinforces other research showing that the tariffs on European goods have, by themselves, not amounted to very much. “They have probably hurt the United States economy more than the intended targets,” the European report says. One reason is that much of the steel that Europeans sell to the United States is especially formulated for specific uses like aircraft parts or oil drilling equipment. American companies sometimes cannot find domestic suppliers able to provide the same products, which often contain patented combinations of minerals or other metals. So, they simply wind up paying the tariffs of 10% on aluminum and 25% on steel and passing the extra cost on to American consumers. “There was not necessarily a lot of production capacity in the U.S. to pick up the slack,” said Oliver Rakau, chief German economist at Oxford Economics, who was not involved in the central bank study. At the same time, the trade war is having a significant psychological impact, the Times says. The administration has rattled European confidence with the tariffs and the U.S. threats to expand them to include cars. Fearful of what may come next, businesspeople are delaying plans to expand their factories or hire new workers. “Uncertainty related to protectionism is weighing on economic sentiment,” the central bank study said, adding that was only one of the reasons for Europe’s tepid growth. Many economists have said that putting tariffs on cars would raise the stakes significantly and cause a lot more damage. As part of the new study, which appears in the European Central Bank’s monthly bulletin, Gunnella and Quaglietti also calculated what would happen if the United States imposed 10 % tariffs on imports from all countries and if all of the countries hit by the tariffs retaliated in kind. The United States economy would suffer the most damage in such a trade war because American products would become more expensive abroad, the central bank economists estimated. China would come out ahead. In Europe, the damage to business confidence in the hypothetical trade war would largely be canceled out by increases in exports to countries other than the United States. European companies would be able to take market share from their American rivals in China. There are already signs that European manufacturers of factory machinery, construction vehicles and other heavy equipment are exploiting the administration’s trade war with China. Industrial machinery is Germany’s second-biggest category of exports after cars and an important sector in countries like the Netherlands and Italy. In recent years, Chinese companies have become more skilled at producing sophisticated machinery and challenging the dominance of European rivals. But White House tariffs on Chinese products have given the European companies at least a temporary price advantage. Still, few business managers are feeling good about the turmoil. “Further trade conflicts would not be in our interest,” Trumpf, a German company known for machines that use lasers to cut steel, said. The United States and China are Trump’s two biggest foreign markets and it has factories in both countries, the company noted. There has long been U.S. discussion and debate about the administration’s basic trade objectives, especially its focus on trade balances limited to goods—and its willingness to intervene in markets with tariffs and other tools that can significantly roil long established markets including those for ag products. The China debate widened the fight to include pressure for structural changes that included the role of government — and which had wider political support in the United States, but which are extremely difficult to enforce. The debate with Europe is still in early stages while the U.S.-China fight appears to be closer to resolution, but the politics involved in the deals being considered — including the new NAFTA — are often murky and complicated, especially as they involve the Congress and its reviews. These are debates producers should watch closely as they intensify, Washington Insider believes.