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EU Should Talk to Trump as it's "Already Sitting in a Glass House" says Commerzbank

© Grecaud Paul, Adobe Stock

“The EU is already sitting in a glass house; it is more protectionist than the US...Instead of retaliating with punitive tariffs, the EU should talk to Trump.” - Commerzbank

The trend toward trade protectionism is set to continue during the years ahead, according to economists at Commerzbank, which may slow the pace of economic growth in the US and other countries but shouldn't be enough to derail the current global economic upturn.

This is, of course, assuming that an all out trade war is averted. However, and despite concerns to the contrary, recent tensions between Washington, Europe and China merely mark a continuation of an already long-established global trend toward trade protectionism. 

“This general trend towards protectionism, which Trump may further reinforce, will rein in economic growth in both the US and the countries with which it trades,” says Dr Jorg Kramer, chief economist at Commerzbank.

“But as long as there is no full-scale trade war to threaten international value chains and trigger extensive adjustments at the corporate level, the present upturn will probably not be jeopardised.”

Concerns over so called protectionism and a possible trade war have mounted ever since President Donald Trump announced tariffs on the imports of aluminium and steel into the US last week, drawing threats of retaliation from the European Commission.

President Trump said last week that, in 15 days time, the US will begin levying tariffs of 10% and 25% respectively on all imports of aluminium and steel from nonexempt countries, which prompted an international outcry from businesses and politicians across the developed and emerging world.

For its part, Washington says the tariff move is intended to protect American steel producers, and jobs, from dumping by state-subsidised foreign producers although it is thought they will be applied to imports across the board, from all countries.

However, European Commission threats of retaliation against the White House drew a stern response late last week when President Trump wrote on Twitter that any such response would merely beget more tariffs on other products.

“One reason for mounting protectionism in recent years is that the negative effects of free trade are far easier to identify and more noticeable than the positive effects,” Kramer says.

“It is clear to everyone, for example, that there is now virtually no German textile industry, with the corresponding job losses. In contrast, the positive effects are rather nebulous.”

Kramer notes that the lower prices paid for clothing in Germany, since the textile industry was offshored, are a clear economic benefit of trade liberalisation.

However, he concedes that “the decisive economic factor” that redundant workers can be used more productively elsewhere looks like an almost academic argument.

The US president singled out Europe’s automotive sector as his next target on Twitter last week, which is notable because European carmakers have significant operations in North America.

However, while the US is their largest market outside of the old continent, it is unclear how tariffs would impact European auto manufacturers.

After all, Europe’s car firms have spent billions developing manufacturing plants in Mexico during recent years and Mexico has been exempted from the new tariffs unveiled so far.

Nonetheless, fears are that an escalation of trade tensions could lead to an all out economic war, where trade tariffs take the place of artillery and infantrymen, which would be damaging to all concerned but particularly the European Union.

The EU runs a large trade surplus with the United States built through the sheer scale of its exports to America, which would be endangered in the event of a tariff fight.

An economic conflict would also cast all of Europe and large parts of the rest of the world under a cloud of uncertainty, which would be economically damaging if conventional thinking on uncertainty is anything to go by.

“Some may argue that simply the fear of a global conflict along these lines could seriously hit the economy, pointing to the threat of a jolt of uncertainty,” says Kramer.

“However, events of the past 18 months in the UK have shown that the threshold for a shock triggered by the prospect of uncertainty is very high.”

Kramer flags the cloud of uncertainty cast over the United Kingdom’s future trading relationship in the wake of the Brexit vote of June 2016, which has had little effect on either foreign investment into the UK or on economic growth. Despite a weighty consensus among economists that the vote alone would lead to severe economic damage.

“The Brexit referendum did after all increase the uncertainty about the UK's future trade relations enormously – probably more than Trump will do – but despite what many feared, UK investment did not plummet, but continued the sideways movement apparent before the Brexit vote,” Kramer adds.

Kramer and the Commerzbank economics team argue the best way for the European Commission to deescalate the situation with President Trump would be for Brussels to curb its own protectionist instincts itself. Beginning with measures aimed specifically at the automotive sector.

“Most economists are recommending that the EU fight back in the customs dispute with Donald Trump. This is likely to prove the wrong strategy. After all, the EU imposes higher tariffs on many goods – including cars – than the US. The EU should offer to Trump that it will reduce its car tariffs from 10% to the 2.5% currently charged by the US,” Kramer writes, in a note Monday.

“The EU is already sitting in a glass house; it is more protectionist than the US, as data from the World Trade Organisation (WTO) show...Instead of retaliating with punitive tariffs, the EU should talk to Trump.”

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