Although the U.S.-China trade dispute has yet to be resolved, it seems as if the Trump administration has already set its sights on another target. On Tuesday, the president took aim at the European Union for its practice of subsidizing Airbus (XPAR:AIR, Financial), the European aircraft manufacturer and defense group, to the detriment of U.S.-based Boeing (BA, Financial). The EU’s support for Airbus has long drawn the ire of U.S. trade officials, which have argued the subsidies unfairly distort the market in favor of the Europeans.
Last year, the World Trade Organization ruled that the EU had violated trade law by subsidizing Airbus, which allows the U.S. to retaliate by imposing commensurate tariffs on the European block. The exact proportionality of the response has yet to be determined by the WTO; however, the Trump administration has gone ahead and proposed $11 billion in new tariffs on a wide range of goods. As well as targeting airplanes and helicopters, the plan would impose additional costs on agricultural produce such as wine and cheese.
The EU, for its part, has argued this is a disproportionate response, which, if implemented, would ignore the WTO’s recommendations (which have yet to be made). Moreover, they argue the unilateral nature of this action undermines the trade dispute mechanisms of the organization, which has implications that range beyond this specific dispute.
Political pressures
Why has the Trump administration decided to go after the EU at this point in time? It is possible this is a sign that the U.S.-China trade dispute is close to a resolution, and that the president feels a political need to maintain his "tough on trade" image. If a U.S.-China deal is perceived as advantageous, then this new action will undoubtedly have more support domestically than if the China talks fall through.
On the other hand, opening a second front in the trade war could turn out to be excessively reckless. Trade talks have stalled and fallen apart many times in the past, and this new action against an American ally could have serious political consequences if consumers start to feel the pain of higher prices.
Impact on the markets
In a statement, U.S. Trade Representative Robert Lighthizer said, “Our ultimate goal is to reach an agreement with the EU to end all WTO-inconsistent subsidies to large civil aircraft...When the EU ends these harmful subsidies, the additional U.S. duties imposed in response can be lifted.”
European officials have pointed out the U.S. is not blameless - last month, the WTO found Boeing has benefited from subsidies provided by the U.S. government.
While these measures have yet to be imposed, the situation could escalate into a full-blown trade war if both sides keep ratcheting up the pressure. This is, of course, in the interest of neither party; the problem is both the US and Europe see themselves as the victim. A proper trade war between them could precipitate a sharp selloff in the equity markets and would drag on the already slowing global economy. With the Federal Reserve abandoning its planned rate hikes, and with the European Central Bank still holding rates at historical lows, central bankers would have few options to respond with if a trade war develops.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Joel Greenblatt: 2 Secrets to Beating the Market
- Boeing: Not Out of the Woods Yet
- What Effect Will a Ban on Stock Buybacks Have on the Market?
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