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EU mulling over right response to US tariffs

October 4, 2019

The US government plans to order punitive tariffs on billions of dollars' worth of EU goods after it scored a victory in a long legal fight at the WTO. Many on the EU side warn of retaliation and potential escalation.

EU mulling over right response to US tariffs
Image: Imago/Ralph Peters

The United States' plan to impose tariffs on billions of dollars' worth of imports from the European Union effective October 18 escalates commercial tensions between the two sides and endangers the world's biggest trade relationship.

Washington's announcement came after the World Trade Organization (WTO) this week authorized the US to impose $7.5 billion (€6.8 billion) in tariffs in response to illegal EU subsidies to aerospace behemoth Airbus, which hurt its American rival Boeing. The penalty is the highest ever granted by a WTO arbitrator.

Read more: Airbus-Boeing WTO dispute: What you need to know

US President Donald Trump hailed the verdict as a "nice victory." Trump wrote on Twitter the EU "has for many years treated the USA very badly on Trade due to Tariffs, Trade Barriers, and more. This case going on for years, a nice victory!"

Over the past couple of years, the Trump administration has been attempting to reduce American trade deficits through tariffs. As part of this, Washington has already rolled out tariffs on European steel and aluminum and threatened to hit the EU's car industry with high tariffs. Trump has to make a decision on whether to slap the EU with additional tariffs on cars and car parts by November 13.

Following the WTO ruling, US officials said they would impose a 10% duty on Airbus aircraft and a 25% levy on various EU agricultural and industrial goods from October 18. Cheese and dairy products as well as items like French wines, Irish whiskey, olives and pork figure prominently on the list of goods being penalized.

"WTO law allows such countervailing tariffs and the aim is to ratchet up pressure where it hurts most in Europe," Gabriel Felbermayr, head of the Kiel Institute for the World Economy, told DW. "We know that sectors like agriculture and viticulture have a lot of influence in Europe."

Read more: EU stance on tariffs needs another look

Pressure to retaliate

EU officials argue that Boeing has benefited from similar subsidies. A parallel case by the EU, alleging illegal US subsidies for the aerospace company, is expected to conclude next spring.

Brussels expects it will be granted permission to retaliate with its own tariffs worth several billions of dollars next year, and has already drafted a target list covering up to $20 billion worth of American products.

"Both the EU and the US have been found at fault by the WTO dispute settlement system for continuing to provide certain unlawful subsidies to their aircraft manufacturers," European Commissioner for Trade, Cecilia Malmström, said in a statement.

She said the US' tariff move now will force the EU to take retaliatory measures.

"We remain of the view that even if the United States obtains authorization from the WTO Dispute Settlement Body, opting for applying countermeasures now would be short-sighted and counterproductive," noted Malmström. 

"Our readiness to find a fair settlement remains unchanged. But if the US decides to impose WTO authorized countermeasures, it will be pushing the EU into a situation where we will have no other option than do the same."

While German Chancellor Angela Merkel acknowledged "we have lost a matter under WTO law," German Finance Minister Olaf Scholz said Europe should react prudently as trade conflicts in a globalized world were in nobody's interest.

German Foreign Minister Heiko Maas told the Funke newspaper group that the EU "will have to react and, after obtaining the approval of the WTO, probably impose punitive tariffs as well."

French Finance Minister Bruno Le Maire also said preparations were under way in Europe to react with sanctions. "If the American administration rejects the hand that has been held out by France and the European Union, we are preparing ourselves to react with sanctions," he was quoted by Reuters as saying.

Read more: Opinion: The world has reached a crossroads in trade policy

Another headache

Despite threats of retaliation, the EU might find itself in a bind when it comes to immediate countermeasures, as Washington's tariffs come with the official approval of the WTO, in contrast to the Trump administration's previous decisions to unilaterally impose duties on imports to the US.   

"There's going to be no tit-for-tat retaliation," White House trade adviser, Peter Navarro, told Fox Business Network on Thursday. "Under the rules of the WTO, which we're complying with here, we get to do this and they should not do anything back," Navarro said.

The Kiel Institute for the World Economy estimates the latest US tariffs to cost the EU about €2 billion. "It's an unnecessary strain at a time of slowing global economic growth," Felbermayr said. If both sides slapped punitive tariffs on each other's aviation products, the US would suffer more than the EU, the expert argued, pointing out that the US sells more aircraft to the EU than the other way round.

Not everyone in the US is cheering the latest tariff move, where trade groups like the Specialty Food Association have issued statements saying that the duties would adversely affect sales and employment.

The mutual imposition of sanctions, observers say, is counterproductive and damaging to both economies, which are closely integrated. The two sides account for about half of the world economy.

US goods and services trade with the EU totaled nearly $1.3 trillion in 2018, according to USTR data. While the US has a $169 billion deficit in goods trade with the EU in 2018, it has a services trade surplus of about $60 billion.

The latest tariffs come at a time when global business sentiment has already taken a hit on the back of growing tensions over tariffs and protectionist tendencies worldwide. They are on top of existing ones that the US and the EU exchanged last year and compound uncertainty for the global economy.

Srinivas Mazumdaru Editor and reporter focusing on business and Asia