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.


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.


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.