Europe's trade confrontation with US escalates

This article was published by Al Jazeera International.

The European Commission opened trade proceedings against the US a day after it announced tariffs on steel and aluminium imports from its closest allies, Canada, Mexico and the European Union, but restrained its rhetoric.

“We’re not in a trade war but we are in a very difficult situation. It could escalate," said Trade Commissioner Cecilia Malmstrom, adding that the US was “playing a dangerous game.”

“This is bad news for European business, the transatlantic relationship and world trade,” said Marcus J Beyrer, Director General of BusinessEurope, an industry lobby group. “The EU needs to remain a strong leader against protectionism and unilateralism in support of rules-based trade,” he added.

US Commerce Secretary Wilbur Ross on Thursday said the US would apply a 25 percent tariff on imported steel and 10 percent tariff on imported aluminium, effective June 30. Europe said it will retaliate with tariffs on $3.3bn of politically sensitive US imports including jeans and bourbon. The EU countermeasures would apply ten days earlier.

The timing suggests that Europe’s leaders are interpreting the US move as tactical, as the two sides compete over deadlines in regional trade negotiations. Those talks were requested by US President Donald Trump, who came to power vowing to protect American blue collar jobs. The original deadline set by the Trump administration was May 1.

“Given the unorthodox techniques deployed by the Trump administration to date, it looks like relations with the US are subject to a perpetual negotiation," Plamen Tonchev, economist at the Institute for International Economic Relations in Athens tells Al Jazeera. “One should remember that the imposition of sanctions on the EU has been postponed twice - so far.”

A trade war, however, should the US and EU stumble into it, risks causing enormous mutual damage.

According to the World Trade Organisation, US merchandise exports were $1.5tr last year. The biggest customer of US merchandise was the EU, at 18.7 percent.

The US is also the EU’s largest single customer. Extra-EU merchandise exports amounted to $1.9tr last year – an eighth of total output. Of this, 20 percent went to the US.

The EU is arguably even more heavily invested in the globalised economy than the US. It is now the leading source and destination for foreign direct investment, topping even the US[1]- and has much to lose from protectionism.

The US position

A January report from the US Commerce Department argues that rising imports of steel threaten American national security: “The continued rising levels of imports of foreign steel threaten to impair the national security by placing the U.S. steel industry at substantial risk of displacing the basic oxygen furnace and other steelmaking capacity, and the related supply chain needed to produce steel for critical infrastructure and national defense.”

The US singles out China, the world’s leading steel producer, as the country it wishes to exclude through tariffs; but China accounts for only 2.4 percent of US steel imports, and both the US and the EU have already slapped punitive tariffs that raise the cost of Chinese steel imports. 

“There is a provision in the World Trade Organisation [that says], if something needs to be done because national security allows it, you’re allowed to do it,” says Peter Chase, global trade expert at the German Marshall Fund. “We are debasing that provision which we argued over for a long time. But we got away with it because we said, ‘we would never invoke this for base economic reason.’ Now we are. So we’re giving everyone else cover to do exactly the same thing, and I guarantee you the Chinese definition of national security is far broader than ours used to be.”

Tonchev believes Trump is risking long-term havoc for short-term gain. “Rising steel prices may help US industries fire up some furnaces in the Rust Belt that the American president presumably cares about,” he says. “In addition, some American aluminium traders reportedly have huge stockpiles, which they will be all too happy to sell at higher prices. At least, that seems to be the idea behind Trump's protectionist policy.”

US steel-using industries, which absorb three quarters of US steel production, are concerned that tariffs will raise the cost of raw materials.

 “We are deeply disappointed that the Trump Administration has decided to move forward with imposing steel and aluminum tariffs,” said a statement from the Coalition of American Metal Manufacturers and Users. Retaliation would harm US manufacturing, the coalition said: “The last time the US imposed steel tariffs in 2002, more than 200,000 American manufacturers lost their jobs.”

On that occasion, the administration of George H.W. Bush reversed itself and lifted tariffs.

“What Mr trump is doing is he’s taking trade, which is in fact a win-win proposition, and he’s making it win-lose; and in this case, lose-lose,” says Peter Chase. “And the Europeans are trying to say, ‘if he’s not going to listen, then the people who get hurt from a silly move will write to their Congressman and say, ‘why do we have to pay for this?’.”

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[1] http://trade.ec.europa.eu/doclib/docs/2017/september/tradoc_156040.pdf