Europe Will Retaliate To Trump Trade War With 25% Tariffs Targeting GOP States

Following through with threats of retaliation made earlier in the week, the European Union on Tuesday is preparing punitive tariffs on iconic US brands produced in Republican-controlled states as US trade partners try to do anything and everything they can to stymie President Trump push to impose massive tariffs on steel and aluminum imports.

In what would be the second shot fired in a global trade war launched by Trump, the EU's tariffs would target (a relatively modest) €2.8 billion ($3.5 billion) of American goods, with Brussels aiming to apply a 25% tit-for-tat levy on a range of consumer, agricultural and steel products imported from the US. The list of targeted US goods, which includes motorcycles, jeans and bourbon whiskey, is intended to send a political message to Washington about the potential domestic economic costs of making good on the president’s threat.

The EU’s retaliatory list targets imports from the U.S. of shirts, jeans, cosmetics, other consumer goods, motorbikes and pleasure boats worth around 1 billion euros; orange juice, bourbon whiskey, corn and other agricultural products totaling 951 million euros; and steel and other industrial products valued at 854 million euros. The Brussels-based commission, the EU’s executive arm, discussed the retaliatory measures with representatives of the bloc’s governments at a meeting on Monday evening.

Paul Ryan, Republican speaker of the House of Representatives, comes from Wisconsin, the state where motorbike maker Harley-Davidson Inc. is based. Earlier this week, Ryan said he was "extremely worried about the consequences of a trade war" and has urged Trump to drop his tariff proposal.

BBG

Ryan wouldn't be the only US official to feel the pressure. According to Bloomberg's strategic hot take, Bourbon whiskey is produced in Senate Majority Leader Mitch McConnell’s home state of Kentucky, while San Francisco-based jeans maker Levi Strauss is headquartered in House Minority Leader Nancy Pelosi’s district.

But more broadly,  Goldman Sachs said the U.S. action, which invokes Section 232 of the 1962 Trade Expansion Act, would risk ratcheting up inflationary pressures just as the Federal Reserve has been raising interest rates. "The tariffs reinforce the reflationary pressure already under way globally," according to Bloomberg.

“The president has likely created a two-tier metal market,” analysts led by Jeff Currie wrote. “Economically, a two-tier market is ultimately damaging to U.S. downstream industries that consume these metals, as it creates an uneven playing field for U.S. industries that face higher metal prices.”

Goldman and many US trading partners reject the national security argument that the president has embraced while justifying the tariffs. Notably, the World Trade Organization has never ruled on a case involving a national security claim.

European Commission President Jean-Claude Juncker and his leadership team are expected to discuss the retaliation proposal at a meeting on Wednesday. The commission is also considering filing a complaint to the WTO against the US and introducing “safeguard” measures to prevent steel shipments from other parts of the world to America from being diverted to the European market and flooding it.

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As we pointed out last night, the ultimate economic impact of US trade measures will depend on the response of other major trading partners. In isolation, increased US trade barriers would tend to reduce the US trade and current account deficits, reducing the US financing requirement and supporting the USD.

Trade

On the other hand, higher import prices might also tend to support inflation, a lower dollar and prompt more Fed tightening and higher US rates than otherwise.

Of course, other trading partners could respond to US actions with protectionist measures of their own, impacting US exports and resulting in a decline in global trading activity more broadly. The impact on the global economy of a ‘hot trade war’ is difficult to model. But the US is considerably less exposed to trade than other G10 economies, as the chart above shows, implying the US might have less to lose than other economies from a deterioration in global trade.

Meanwhile, Trump, who surprised America's trading partners by announcing the tariffs on Friday, has dismissed the idea that his proposed 25% tariff on steel imports and 10% on aluminum would trigger a devastating trade war. In fact, when a country is losing as much money to trade as the US, trade wars become "a good thing" the president said.

Comments

OverTheHedge Fahq Yuhaad Tue, 03/06/2018 - 13:00 Permalink

Ghordius has a habit of disappearing when there are major negotiations - he was never about during the Greek meetings, for example. I wonder if he is part of the Brexit team. He has been hardly here at all since Christmas.

Speaking of which, I take it that this is bullish for a UK/EU rapprochement and super trade deal? Looks like the wheels are coming off everywhere, all at once. German exports heading down, Italy wants Italout, Brexit nightmares. Ghordius will have his hands full.

 

In reply to by Fahq Yuhaad

crazzziecanuck Whoa Dammit Tue, 03/06/2018 - 09:02 Permalink

But that just indicates that the disconnect from the leaders and actual citizens is getting wider.

Like you say, the jeans are not made in the USA, but the executives who pay to have them made abroad will be impacted by the tariffs.  It's not as if Americans will be losing jobs over this since Levi outsourced most of it's production abroad anyway.  Impacts on American consumers will be much less painful than it will be of these executives.  And I think that's the point.

The American leadership won't lift a finger to stop "American" firms decimating the rank and file worker, but they'll get the message when the executive class starts to hurt and rush to save them.  That's why campaign dollars is the ultimate in business "insurance."

Like Mark Blyth noted a few times now, the average American really doesn't believe Trump will make their lives better, but Trump will make the lives of those who've sucked all the wealth to a few cities on the coast much worse.  And that will bring smiles to voters faces and justify their votes for Trump.  The elite have gotten away with their brutal practices for way too long.

In the end, though, Trump will not "win" the trade war.  He's just making more and more enemies of the powerful.  People delude themselves thinking the elite were anti-Trump.  Just the vocal minority was.  Most knew full well they would win no matter who won in 2016.

In reply to by Whoa Dammit

caconhma Whoa Dammit Tue, 03/06/2018 - 11:47 Permalink

If everything is so good and we need no import then why do we have zillion US$$ trade deficits?

PS

My friend is leasing BWM and is very happy. At the lease end, she considers buying the car.

I personally had GM car for 10 years. It was a real POS. Now, I am driving Toyota and Honda. The drive quality is "a plain vanilla" but reliability is excellent.

In reply to by Whoa Dammit

Moe Howard Juggernaut x2 Tue, 03/06/2018 - 08:17 Permalink

Worst [new] car I ever purchased - 2003 VW Passat Wagon. Almost monthly recalls for years - throughout the warranty period and beyond, mostly electrical failures. Brakes never worked correctly, even after replacement of the complete brake assemblies on both front wheels on the very first service date. Rear washer failed just after warranty was over, was told "too expensive to diagnose and would cost a fortune to repair". Total POS. I will never purchase another German car again, period.  Nice sound system, but the adjustment knobs [plastic] all self-destructed in 4 years. Ended up buying rubber vacuum caps to cover the exposed metal shafts, as the replacement knobs were unobtainium.

I remember taking a test drive at Ford with a salesman about 4 or 5 years after purchasing the VW for my wife. I drove my 350z to the dealer. About half way through the test drive, the salesman asked about trade in, I explained we had a 2003 wagon, not sure if we want to trade in. He said, and I quote "I hope it isn't a VW Passat". 

 

Keep your German autos, I personally am not interested.

 

LOL

In reply to by Juggernaut x2

SubjectivObject Moe Howard Tue, 03/06/2018 - 09:03 Permalink

VW's 

The Germans are cagey ones

They have no respect for the US auto buying demographic (which is not wholly unjustified), and so they send their statistically challenged production to the US.

The year I bought a 2002 Golf, I did not notice that the drive train warranty changed from the 10/100 for the 2001 model to ?yr/60.  My babied tranny dutifully, nay statistically predictably, blew it at 67 kmi at a cost of near 1/3 the original vehicle cost.  I have since talked at least 20 people out of buying VW.  Just doing my part.

In reply to by Moe Howard

a Smudge by an… Moe Howard Tue, 03/06/2018 - 09:30 Permalink

Once again the conservative used car buyer wins! With the advent of the interwebs, we have all these consumer review sites for cars. All you do is wait 3-5 years and see which make/model/years are most reliable and lowest maintenance. Our 1989 Ford Explorer seems like it might outlast the USA as a nation state. Kia Sedonas as looking great and if you like your traditional American trucks, you can buy and keep your truck now because what they are coming out with next?

WILL BE GIGANTIC PILES OF SHIT WITHIN A DECADE.

In reply to by Moe Howard

Vendetta Juggernaut x2 Tue, 03/06/2018 - 08:25 Permalink

Yeah right ... my 14 year old Jeep runs great, very dependable, looks great and maintenance costs are very low  ($3500 over the last 4 years for standard stuff) ... whereas my brother is attracted to the mercedes, BMWs and now land rovers and it has been extremely expensive for him ... just a new back window of his mercedes cost $800 ... that's value?  forget it!!  bring on the tariffs.. fuck brussels, the european union and people like juggernaut..

In reply to by Juggernaut x2

keep the basta… Vendetta Tue, 03/06/2018 - 10:16 Permalink

I have a frameless window outback subaru for country and a frameless window dual exhaust 3 litre Subaru liberty, going perfectly never ever a problem, nothing ever went wrong, 2004 models because after that the cars were hideous, made for the big bummed and daggy. Guy drove into my ride at speed, just had doors replaced and I was unijured.

In reply to by Vendetta

BarkingCat Xena fobe Tue, 03/06/2018 - 12:38 Permalink

Hey, I drive a Mercedes.....but it is old enough to buy a drink at any American bar.

I actually cannot complain.  Over the 15 years or so that I have owned it, I have spent about $4K on repairs and $2K was last year after the car sat in Seattle over the winter and suffered from the wonderful climate here.  Also  $500 of that was the windshield that I chose to replace using an OEM part instead of the  $200 aftermarket. 

 

Still, this will be my last German car.  When it goes to a mechanic, things get expensive quickly.

In reply to by Xena fobe