Jeffrey Taylor, head of European Equities and the European Equities Team at Henley Investment Centre has published a new report for Invesco detailing the characteristics of any potential US-EU trade war.
Mr Taylor concludes in the report, titled “Europe vs US: A whole new ball game?”, that an economic conflict between the US and EU remains unlikely despite the imposition of sanctions and tariffs on goods imported from China and Mexico. This is due to the costlier ramifications of a trade war between the US and EU, and the lack of political will in The White House for such an outcome.
He also argued that the EU is well-positioned to respond to any sanctions and tariffs imposed by Donald Trump, as the negative consequences of retaliatory action from the EU could prove to be especially damaging to the US economy.
He said: “Firstly, it is worth noting that trade between the US and the EU forms the largest bilateral trade flow in the world, with US exports to and imports from the EU in 2018 estimated at $570 billion and $670 billion respectively. To put this into perspective, US exports to China are worth about 0.5 percent of US GDP, while US exports to the EU are worth about 1.55 percent of US GDP. As a result, reciprocal action taken by the EU to sanctions imposed by the US has the potential for wider impact than action taken by China – arguably up to three times as much.”
Alongside the severe impact of a trade war with the EU, Mr Taylor also argues there was less fervour in Washington engage in hostile economic terms with Europe, as it provided less political capital for Mr Trump heading into a second election.
“Secondly, there is weaker US political support for a trade war with the EU. ‘China bashing’ in the US has long been a vote winner for both Democrats and Republicans, whilst a trade war with the EU is unlikely to garner the same political support. Given many European companies are employers of US workers, some of whom operate in key pro-Trump states (e.g. BMW in South Carolina and Daimler in Alabama), it would be a very risky strategy for Trump to potentially put jobs (and votes) on the line in order to engage in a trade war with the EU, especially as he gears up for a 2020 re-election bid.”
He did speculate in the report on which goods would be targeted by the US, and noted that the largest trade imbalance between the two trading blocs is the auto sector.
“Auto-related goods (cars, parts, tyres) are approximately 15 percent of the EU’s exports into the US, and only 5 percent of US’s exports into the EU. In 2018 alone, this imbalance was roughly equivalent to $45 billion dollars in favour of the EU. This is where US leverage is the greatest, and in our opinion, would be Trump’s likely target.”
If measures were put forward by the White House to rectify the situation, Mr Taylor believes the EU would be well prepared for such a policy and would respond in a calculated fashion to affect Mr Trump’s personal political ambitions as well as the wider US economy.
“Targeted US products include Harley-Davidson motorcycles, agricultural goods, bourbon, blue jeans, steel and aluminium. The EU response to the sanctions imposed by Trump appears to be highly strategic, targeting products from swing-states and, in effect, taking direct aim at Trump and his re-election campaign. An escalation in tariffs by the US will likely see the EU amplify their own efforts accordingly.”
Consequently, Mr Taylor concludes that “a trade war similar to what we are witnessing between the US and China seems unlikely”. He even suggests that an “an easing of rhetoric” is possible due to the much more potent ramifications of a trade war with the EU, which would affect Mr Trump less than 18 months before his second presidential election. That said, the nature of Trump’s social media behaviour could still cause uncertainty.
He added: “Nevertheless, in a world of Trump, we believe there is plenty of scope for a barrage of tweeting to cause some market volatility in the short-term.”
