October 14, 2019
Tariff Insider: EU Tariffs, U.S.-Japan Deal, and the Latest on U.S.-China Trade War
From retaliatory tariffs to expanding exception lists to ever-changing tariff deadlines, it is an understatement to say that evolving trade regulations have created a climate of uncertainty.
And while the U.S.-China trade war developments have been in the spotlight in recent months, in today’s edition of Tariff Insider we go beyond this bilateral battle, giving an update on the happenings on the global stage.
U.S. approved to impose tariffs on EU products
On October 2, 2019, the World Trade Organization (WTO) approved a series of US-imposed tariffs on items being imported from the European Union, to take effect October 18. The tariffs—which could total $7.5 billion—come after a longtime legal debate between the EU and US-centered on their respective leading aircraft manufacturers, Airbus and Boeing. The issue in question, which dates back to 2004, centers around whether or not each region’s subsidization of their respective airplane manufacturer has been fair.
Declaring the subsidies provided by the EU to Airbus have been illegal, the WTO ruled that the U.S. can fairly impose countermeasures on EU products across several European countries, including the UK, France, and Germany. The proposed duty increases—up to 100% across a number of items—impact a range of goods, from jetliners to wine and cheese to cashmere sweaters. The full list of affected products as published by the United States Trade Representative (USTR) can be found here.
Beyond the financial implications to shippers, this move marks the largest trade action taken against the EU since Trump’s 2018 steel and aluminum tariff plan. In response, Airbus warned the measure could hurt the global economy at large—and most notably the airline industry—as 40% of Airbus’ parts are sourced from U.S. aerospace suppliers.
Looking forward, there is a parallel case that the EU has pressed against U.S. subsidies to Boeing. “Most observers expect the WTO will authorize the EU to impose tariffs on imports from the United States. It won’t be explicit retaliation for the U.S. Airbus tariffs, but it will have the same effect,” says Phil Levy, Flexport’s chief economist. “While these tariffs are large relative to past WTO disputes, they are small relative to the trade conflict we have seen between the United States and China. That means the effect is more likely to be one of additional harm to the trading system and continued uncertainty rather than a broad macroeconomic shock that would increase the odds of a recession.”
In 2020, the EU expects a decision from WTO on the legality of U.S. subsidies on Boeing, and we might expect to see similar tariffs on U.S. goods accordingly.
Between Japan and the U.S., steps towards progress
Meanwhile, on October 7, the U.S. and Japan finalized a limited trade agreement. Japanese tariffs on American agricultural imports, expected to go into effect January 1, will be reduced by upwards of $7 billion. Among those items affected: cheese, beef, almonds, wheat, and pork. A full list of affected products as identified by the USTR can be found here. In response, the US will lower tariffs on $40 million worth of Japanese goods, including food items such as soy sauce and other products sold via digital trade.
The deal is a win for American farmers who lost to competitors in Australia, New Zealand, and Canada after President Trump pulled the U.S. out of the Trans-Pacific Partnership early in his presidency. And while the agreement presents some progress, a few items of note were not included: notably, U.S.-imposed tariffs on Japanese automobiles, Japan’s largest import to the U.S., and Japanese-imposed tariffs on U.S. aircraft and semiconductor manufacturing equipment.
Both countries have indicated that they’d like to sign a more comprehensive agreement in 2020.
U.S. and China reach mini trade agreement
In the last Tariff Insider, we covered the delay of List 1, 2, and 3 tariff hikes from October 1 to October 15. Last week, Chinese and U.S. officials met in a series of negotiations, which ended in a decision to delay the duty increase of $250 billion worth of products to 30%.
In addition to the postponement of the tariff hikes, China offered an olive branch of its own in the form of: increased agricultural purchases from the US from $40 billion to $50 billion, a promise to stop using its currency as a trade weapon, and undisclosed changes to intellectual property provisions.
While Trump called this development “a very substantial phase-one deal,” the agreements have not yet been formalized on paper and have not been announced by the USTR. The U.S. stocks responded by surging on Friday, with the Dow jumped 300 points.
While formal documentation of the terms might occur over the course of the next four weeks, we can also anticipate a more complete deal to be reached in unannounced second and third phases of negotiation.
A Note from Flexport’s chief economist
Amongst all the change, the trend we have been seeing is toward limited trade deals—Japan agreement, the proposed China deal, and even the NAFTA-replacement deal—as the Trump administration tries to demonstrate results. According to Levy, such deals can help the industries that received new opening, but may be problematic for others as they can reduce the odds of a more comprehensive deal in the near future. “In some ways, that leaves the administration in a ‘No Man’s Land’—enough protection to disrupt business but not enough to convey the image of doing all they can to get tough,” explains Levy.
All in all, according to Levy, this has tended to create an unstable policy situation, with pressure on the administration to either remove its protection or to double down—the tendency of which has been to double down. “If the administration chooses to double down further, one obvious vehicle would be to impose tariffs on the import of automobiles,” says Levy. “This would likely ignite new conflict with the EU and Japan, and maybe the U.S. Congress as well.”
We will be tracking developments on the global front as they emerge. Stay tuned for more details in the next edition of the Tariff Insider.