Dr. Fragkiskos Filippaios is the Associate Dean (Graduate Studies) at the Faculty of Social Sciences, University of Kent
The United States’ administration has recently focused a substantial part of its attention on rebalancing trade relationships and trade agreements with the rest of the world. Rather than resolving those disputes through the formal arbitration procedure of the World Trade Organisation (WTO), the US has unilaterally imposed tariffs on a number of products.
The main economic effects of these tariffs are not substantial. However, this strategy has been seen by most US trade partners as an attempt to put political pressure on other governments to re-evaluate their trade relationship with the US. Additionally, this move re-engages governments in trade negotiations with a view to secure more favourable terms of trade for US products.
A trade war between the US and European Union or the US and China, which happen to be two of the largest bilateral trade partnerships, is still only a scenario and not yet a reality. Despite this, it is worth considering its impact on trade by looking at the current picture and potential winners and losers, but also at the way these trade partners have resolved their disputes in the past.
The current trade relationship between the US and the EU definitely favours Europe. In 2017, the US maintained a trade deficit with the EU of over $151 bn. Almost half of that was with Europe’s largest economy, Germany, which accounts for over $64 bn. Adding to this, the trade deficit with Ireland of $38 bn and Italy with over $31 bn, makes it clear that two thirds of the overall balance can be attributed to just three EU countries.
The current trade relationship between the US and the EU definitely favours Europe
From a product perspective, the key contributors to this particular deficit between the US and EU are chemical goods, with a trade worth of $41 bn. Furthermore, machinery and transportation equipment makes up approximately $29 bn in deficit each. From a US perspective, a trade surplus with the EU only exists in products such as oil, agricultural goods and minerals and ores, with a trade surplus of just over $6, $5 and $4 bn respectively.
With this picture, one can verify the argument that the recent US administration’s decision to impose tariffs on a number of products does not apply to those that has the highest contribution to the US-EU trade deficit. Therefore, this strategy has only political implications, not economic ones.
A very similar scenario emerges when we analyse data for individual US state trade with the EU. The three regions with the highest exports to the EU are California, Texas and New York. California exports primarily computers and electronic equipment; Texas exports oil and gas as well as chemicals; and New York predominantly exports used or second hand merchandise. This shows that a trade war can have a number of winners and losers depending on which sectors or products the two partners might wish to target.
It is also difficult for the two partners to calculate the exact costs of such a trade war given the complexity of the relationship and the unequal distribution of trade flows. The issue in scenario planning means that although the two partners might use some trade instruments to influence the relationship, the US administration’s decision to impose trade tariffs will probably remain at the political level and will not develop in a full trade war.
In the past, both the US and EU have aimed at resolving their trade disputes within the context of the WTO. Over the last 25 years the US has filed 117 cases in WTO as the complainant. Out of these 117, only 19 were directly addressed to the EU as a respondent. The EU on the other hand has filed 64 in total as a complainant with 33 having a direct respondent in the US.
Both the US and EU have aimed at resolving their trade disputes within the context of the WTO
Given the vast amount of trade between the two partners, this amount of reported cases is relatively small. US cases against the EU focused on agricultural and technology products, whilst EU cases against the US targeted textiles and metals. The last case filed by the US was in 2009 regarding poultry produce, whereas the most recent one from the EU looked at tax incentives for large aircrafts in 2014.
Both parties have managed to resolve their disputes through the WTO. Despite some delay to come to a mutually agreed outcome or accept the resolution of the appellate body, this has been a constructive way of settling any trade related differences. It would be strange to see two players compete in trade war by rapidly escalating tariffs without attempting to resolve any issues through the WTO mechanism first.
It is undeniable that we have seen a change in the way the US administration behaves under President Trump regarding major issues such as trade. This shift in rhetoric demonstrates a more aggressive foreign policy attitude that sends a strong political signal to those outside of the US borders.
The US has sent, through imposing tariffs, a clear political signal that hopes to address the substantial trade deficit and review trade relations with key partners such as the EU and China. This supposedly constitutes as ‘putting America first’. These signals have not been welcomed but have not yet led to a full explosion of retaliation measures that could lead to a trade war.
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