SNAPSHOT: US proposes new tariffs on EU products, threatening to escalate trade tensions

On 8 April, the US threatened to impose new tariffs on the EU, heightening the risk of a major trade dispute between the world’s two biggest economic areas.

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BACKGROUND
  • On 8 April, the US government published a preliminary list of USD11bn worth of goods imported from the EU, which could face tariffs due to a dispute at the World Trade Organisation (WTO) between Washington and Brussels. This is over subsidies EU member states provide to European aerospace company Airbus. In May 2018, the WTO ruled that subsidies given by some EU member states to Airbus had an adverse impact on US commercial interests.
  • The list of proposed products that could face new tariffs was published in anticipation of a WTO decision, expected this summer, on the actual level of duties the US will be allowed to impose. US Trade Representative Robert Lighthizer said that only after the EU withdraws ‘these harmful subsidies, the additional US duties imposed in response can be lifted’.
  • Responding to the US’s announcement, the EU said the USD11bn worth of tariffs was ‘greatly exaggerated’. Airbus said the threat of US tariffs was ‘totally unjustified’ and added that ‘all necessary measures’ were taken to comply with WTO rules on state aid.
  • Food products featured in the preliminary list include fresh or chilled salmon, virgin olive oil, and cheddar and Gruyère cheese. Aerospace products manufactured in the EU, such as passenger aircraft, non-military helicopters, fuselages, and undercarriages for new civil aircraft, could also face additional tariffs. Such tariffs would mostly impact countries which host Airbus production facilities, such as France, Germany, Spain, and the UK.
Airbus
Airbus A380
ANALYSIS
  • The case brought by the US government at the WTO dates back to 2004, when Washington filed a claim over concerns that the governments of France, Germany, Spain, and the UK had provided illegal financial support to Airbus, which enabled the development of several products. According to Washington, this in turn allowed Airbus to sell products at low prices and gain an unfair competitive advantage, particularly over US-based rival Boeing, in key markets such as Australia, China, and South Korea. Similar claims were also made by the EU, which argued that Boeing had received USD19bn in subsidies from US federal and state governments between 1989 and 2006.
  • The US government’s decision to publish a list of proposed products months before receiving the WTO’s verdict on tariff levels suggests that it is linked to recent developments relating to Boeing, the main competitor of Airbus in what is essentially a global duopoly in commercial aircraft manufacturing.
  • The development comes after multiple airlines and regulatory agencies grounded the Boeing 737 Max aircraft following the crash of an Ethiopian Airlines Boeing 737 Max 8 on 10 March in which all 157 passengers were killed. Concerns over the safety of the aircraft became widespread after a plane of the same model operated by Indonesian airline Lion Air crashed in October 2018, killing 189 passengers and crew. The most recent accident prompted the company to cut the production of the 737 Max aircraft by 20 per cent.
  • The move to implement new duties on imports from the EU exacerbates already strained trade relations between Brussels and Washington. According to the US government, exports to the EU in 2016 totalled USD501 billion, while imports amounted to USD592 billion. In May 2018, the US imposed duties on European steel and aluminium exports. The EU retaliated with duties on more than USD3 billion worth of US imports a month later. US President Donald Trump is critical of the EU for its perceived restrictive trade practices in areas such as agriculture, and the US’s large deficit in bilateral trade.
  • The announcement of the new measures jeopardises efforts to defuse trade frictions through ongoing talks. In July 2018, European Commission President Jean-Claude Juncker visited Trump in Washington, and the two sides seemingly resolved to improve bilateral trade ties. The EU agreed to purchase more US soya beans and liquified natural gas (LNG), while the US pledged to restrain from imposing tariffs on EU-built vehicles.
  • The agreement did not resolve competing trade interests, however, and Trump, who views the WTO decision as a vindication of US concerns, has repeatedly threatened to impose tariffs on vehicles imported from the EU.
  • Rather than risk escalating the dispute, which could lead to US tariffs on EU vehicles, the EU will likely respond to the measures by implementing reciprocal tariffs. Such tariffs would likely be placed on similar aviation sector products, including components. Any such move would likely quickly follow the imposition of US tariffs.
  • The WTO ruling, coupled with the risk of new tariffs on products from across the EU, will increase pressure on the four EU member state governments involved in Airbus production (France, Germany, Spain, and the UK) to entirely withdraw or remove subsidies given to the company. This is unlikely, however, at a time when some of the EU’s most powerful members states, including France, are moving towards promoting national, or in this case European, industrial ‘champions’.
Soybeans
The EU has pledged to purchase more US soya beans
RESPONSE
  • While tariffs are currently being considered, it is imperative that companies closely scrutinise their supply chain exposures and the implications of deficiencies in supply chain risk management from financial, legal and reputational perspectives. Risk management and alternative insurance strategies should also be explored, including protocols for assessing a company’s readiness for addressing and funding supply chain disruption.
  • One immediate implication of the likely implementation of new tariffs on selected EU goods will be higher prices for importers and end users in the US. For instance, retail businesses in the US relying on imported dairy products from the EU will face higher purchasing costs. The same risk will apply to similar EU firms in the event of a retaliatory move.
  • Businesses in the EU that manufacture components for commercial aircraft will be hit particularly hard if the proposed duties are implemented. Companies should evaluate how resilient their supply chains are to external shocks, including the mutual imposition of tariffs, and consider identifying alternative export markets as part of their contingency plans.
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