The US, at least this current administration, has mystified its European Union business and political partners. The EU represents one of the very largest economies on the planet. The EU is also very much a trusted ally of the US. The EU market continues to be a fertile ground for US exports. So, it was quite a surprise that the US seemed to be picking a trade fight with the EU.
Aware that they had to do something the EU threatened its own retaliation against the US, if tariffs are imposed. In fact, the French President even stated that when pushed by the US the EU had to push back in order to give the EU leverage in future negotiations.
At the same time, both the US and the EU are well-aware that they should be uniting their efforts, not dividing them, as the real trade threats emanate from China. It therefore behoves both the US and the EU to jointly stand up to China rather than aim their ire at each other.
Some hope towards finding a solution is seen in the visit by Mr. Jean-Claude Juncker of the EU to the US. There seems to be some keen interest by both the Europeans and the US to find practical resolutions to their economic concerns.
The bright minds at Bouchard Fintech have pointed out that China was and continues to be a difficult business partner and competitor at the same time. The Chinese have had a long and well-documented history of manipulating their currency to better suit their exporters. They also have continued to subsidise their local industries while putting up multiple layers of trade barriers to imports from overseas. Additionally, China has very actively encouraged their population to buy locally and to shun, if at all possible, importing from other countries. The results are clear for all to see with China continuing to post year after year of trade surpluses as it exports far more than it imports.
China, as a country with a one-party rule, has huge advantages over the US and the EU. After all, China does not need to consult with other political parties or even seek the electorates permission. Rather, the government of China can simply plan and act as it sees fit.
Note how China has moved to provide help, assistance, financing, lower energy rates and much lower taxes on their internal key industries. China has made it clear that it intends to dominate in the fields of super-computers, robotics, renewable energy, electric cars and other key areas that are most likely to impact the near future in terms of growth, economic prowess and economic dominance.
Added to all of the above China-related concerns are two additional factors. The first has to do with the fact that China has habitually disrespected intellectual property, patents and trade secrets. Secondly, China has announced that it intends to be self-reliant and the world's largest economy by 2025. These two facts alone should send real shock waves to both the US and the EU.
On top of all of the foregoing, China continues to put up non-tariff barriers to trade while protecting its own industries from foreign competition.
It is not all China's fault though. The US has managed to undermine its own economic power by reneging on the Trans Pacific trade agreement known as TPP. Under the previous US administration, the US sought to lead the TPP. When the new administration took office, they very abruptly exited the TPP just before it was supposed to come into effect. In essence, the US shut down new markets for its exporters and shuttered opportunities of better trade with some of the fastest economies. The US argues that they want a better deal than TPP but trade deals can take years to negotiate. Case in point, the TPP agreement had taken close to five years to put in place.
Incidentally, while the US complained about the TPP and decided not to be a part of it, China went ahead and ratified that agreement. Effectively making China, and not the US, the biggest partner in the TPP. This withdrawal of the US from TPP has rendered China with far more economic clout and financial prowess.
Of note is the fact that TPP includes restrictions on what the partners, including China, can do in supporting their local economies and subsidising their local industries. It could well be argued that TPP put real constraints on China and that by being a part of it the US would have more to gain.
With China clearly a business rival, the US needs its EU partners more than ever before. Hence it makes little sense that the US is threatening its EU partner with additional tariffs including on the highly coveted automotive sector. For the Europeans, the automotive industry is not one to be taken lightly. In the event that the US imposes tariffs on European made cars, the EU has vowed to retaliate, in kind. The net effect is likely to be a reduction of car production in both the EU and the US. Interestingly, some studies have shown that under retaliatory tariffs between the US and the EU it would be the US itself that will be harmed more than the EU.
Amidst all of this are threats to how international trade is carried out. There has been so much criticism of the World Trade Organization and its arcane rules that confidence in the WTO has steadily declined. However, it should be noted that many of the same rules that the US is complaining about were, in fact, largely demanded by the US. Additionally, the WTO acts as an arbiter for trade disputes and with its reputation being tarnished it will make it harder, not easier, to solve those trade disputes.
Bouchard Fintech notes that more recently, and in an effort to check Chinese subsidies, the US the EU and Japan have partnered together. They aim to provide a united front in order to lessen China's subsidies to its domestic industries.
The matter now appears to come down to this: Either the US and the EU stand together to their mutual benefit or they fight each other to their mutual detriment. Meanwhile, if the US and the EU do not combine their trade and financial power they will be aiding, not checking, China's trade practices.
Bouchard Fintech
