SIM Report: Western & Northern Europe, Issue 7

 UNITED STATES & EUROPEAN UNION: US tariffs on EU products likely to be lifted as warmer trade ties expected under new US administration

An escalating trade dispute between the EU and US may reach a peaceful resolution after new US President Joe Biden assumed power on 20 January. This comes as the US government announced on 11 January that it would start collecting new duties on aircraft components and other products from France and Germany from 12 January. As part of the new tariff regime, an additional 15 per cent tariff on aircraft parts such as fuselage and wing assemblies has been introduced as well as a 25 per cent duty on selected wines. Both sides received favourable rulings at the World Trade Organization (WTO), granting Washington permission to impose tariffs on USD7.5 billion of EU goods, while the EU can introduce USD4 bn of duties to US imports.

At the core of the dispute are mutual allegations between the US and EU, which accuse each other of unfairly supporting their respective airplane manufacturing firms, Boeing and Airbus. In 2006, the US filed a case in the WTO accusing Airbus of receiving EUR19.4 bn in illegal subsidies; the EU countered with another case, claiming Boeing had benefited from USD23 bn in ‘trade-distorting’ subsidies. The WTO found that both parties had granted unfair subsidies, allowing them to levy tariffs as penalties. The US acted first by imposing tariffs on a range of EU products, including wine and cheese. According to France-based industry body FEVS, a decrease in EU shipments to the US saw French wine and spirits exporters lose EUR600 mn in sales between October 2019 and November 2020.

In November 2020, the European Commission Executive Vice President Valdis Dombrovkis confirmed that the EU would move ahead with plans to introduce up to EUR3.37 billion in tariffs on a range of imported US goods. This included US aircraft and farm produce such as fruits and nuts.

While trade tensions have deteriorated steadily under the presidency of Donald Trump, the election of Biden creates scope for compromise and a likely de-escalation. Importantly, the Biden administration will likely usher in a climate of confidence that both sides can rely on to hold constructive talks in the hopes of resolving outstanding differences. This at least is what the EU anticipates.  

On 17 January, French foreign minister Jean-Yves Le Drian said the EU and US should ‘find a method’ to suspend the ongoing dispute, echoing views shared among fellow European diplomats. As such, in the medium-to-long term trade relations are expected to improve considerably. However, firms on both sides of the Atlantic will face higher trade and operating costs due to the new tariff regimes. In practice, this will mean a potential shortage of goods. US-based firms exporting products to Europe, and EU exporters should factor the higher duties into strategic planning, and consider identifying alternative export markets as part of contingency plans. Companies impacted by the tariffs should contact suppliers, update price agreements, and recalibrate supply chains accordingly.

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