I am a globalist.
And I don’t care if you find that preposterous.
When countries get along and collaborate, the world is a better place.
There are fewer wars, and economies thrive.
Which is why I was shocked to hear President Trump once again attack the EU with a barrage of negative comments regarding bilateral trade.
We might understand an attack on Russia or Iran… but not on the United States’ greatest strategic ally.
He even went so far as to threaten the Bloc with a fresh set of tariffs on $11 billion worth of goods.
But can the U.S. afford another devastating trade war… as the one with China carries on?
Let’s find out…
The Apple Of Discord Between The World’s Largest Trading Partners
The relationship between Washington and Brussels began to turn sour shortly after Donald Trump took office in 2016. One of his first policies was to end the negotiations about the Transatlantic Trade and Investment Partnership (TTIP), the largest bilateral trade deal ever.
He even accused the EU of being “just as bad as China” and a “brutal” trading partner.
Soon thereafter, President Trump would shock leaders in Brussels by imposing tariffs on European steel and aluminum. Of course, the EU immediately retaliated with its own set of duties on American staples such as denim, bourbon, and peanut butter.
The outlook was grim, especially as the United States was already in a full-fledged trade dispute with China.
To resolve the situation, European Commission President Jean-Claude Juncker had to fly across the Atlantic and meet with President Trump.
In what was a short meeting, the two agreed to work together, to bring existing tariffs closer to zero on non-auto industrial goods, and to increase EU purchases of U.S. natural gas.
However, the “ceasefire” didn’t last long, and Trump is again on the offensive.
This time, the dispute started over the long-forgotten EU subsidies to airplane manufacturer Airbus. As if Boeing doesn’t receive the same subsidies from the U.S. government. Either way, the World Trade Organization (WTO) resolved the case years ago.
Nonetheless, the situation escalated last week. Now, we are looking at $11 billion worth of tariffs on each side… and potentially a new trade war.
Why This Trade War Makes No Sense
However, despite Washington’s threats and Brussels’ willingness to retaliate, I don’t think a trade war between the two economies will happen.
Why? Because the EU is not China.
First, Brussels doesn’t depend as much as China on U.S. trade and can respond in a highly targeted fashion… as it did in 2016, when the two economies then quickly found common ground afterward.
Second, the EU and the United States do roughly the same amount of business with one another, making the deficit small. Moreover, trade as a percentage of GDP in the EU represents only 17%. On the other hand, it represents 27% in the United States, so it’s plain to see who has more to lose.
Finally, Brussels would be able to withstand U.S. tariffs longer than the United States would be able to stand those from the EU. Indeed, the situation could make the EU more unified. It’d have a common enemy.
Meantime, Donald Trump must resolve the issues before the 2020 elections and can’t afford to threaten the already compromised U.S. economy in the meantime.
Therefore, I don’t expect we will see a trade war or even a significant trade deal for that matter. I’d say you can sleep in peace.
As far as I can tell, this is just the latest publicity stunt from the U.S. president who is keen to remind everyone that America needs a strong leader, one who can make it great again… and we all know who that is.
Good investing,
Leon Wilfan
