Jul 27, 2018

Hope for US-EU Trade Cooperation

Is There Light at the End of the Tunnel for Our Trade Dispute with Europe?
Christine McDaniel Senior Research Fellow

Jean-Claude Juncker, the president of the European Union’s (EU) European Commission, and President Trump’s announcement on Wednesday to launch talks of an EU-US industrial duty-free bloc should make us all cheer. Their call for a truce on the Section 232 steel and aluminum tariffs and the retaliatory tariffs was also welcome news.

They issued a joint statement to tackle other larger and thornier issues like reforming the World Trade Organization (WTO), and China-specific concerns such as subsidies, state-owned enterprises, and intellectual property theft. Teaming up with like-minded countries who are just as frustrated with China has been a long time coming. Indeed, many of these issues appear to be beyond the reach of the WTO, and market-oriented solutions will take serious cooperation among global leaders. Many will be watching closely and tracking follow-up actions to these stated commitments.

Many will be watching closely and tracking follow-up actions to these stated commitments.

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Without a doubt, a tariff-free industrial goods agreement would likely have net positive effects for the US and EU economies. On average, US tariffs are lower. The unweighted average EU customs duty is 5.2 percent, versus the US rate of 3.5 percent, but there are tariff spikes on both sides of the Atlantic. For instance, the US has a 25 percent tariff on pick-up trucks, the EU has a 10 percent tariff on cars. There are many other examples, as shown in tables 1 and 3 in this joint UN/WTO analysis.

The longer these trade spats continue, the more likely they will snowball into real economic effects. In the latest World Economic Outlook, the IMF notes,

The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment.”

At the very least, a tariff-free EU-US bloc would give global markets some much-needed certainty—and we could move on from unnerving tariff escalations. The tariffs are showing to be a real wrecking ball for certain parts of the US manufacturing sector and for American farmers (which we have written on and continue to track).

Protectionism hurts consumers and holds back domestic industries. Trade wars add to this mess by introducing instability and pitting allies against one another. Here’s to hoping that the two sides can carry out the intentions laid out this week by Mr. Juncker and Mr. Trump. 

Photo credit: Shutterstock

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