Are Trans-Atlantic Trade Ties Entering Freezer?: QuickTake Q&A

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While President Donald Trump has trained most of his protectionist fire at China and Mexico, the European Union is America’s biggest trading partner. U.S. lawmakers are considering a border tax on corporations, which could complicate the world’s biggest bilateral trading relationship.

1. How much trade are we talking about?

Every month, about $100 billion of goods and services move between the U.S. and the EU. The main European exports to the U.S. include autos and drugs, while aircraft and machinery are among the largest American exports to Europe.

2. Who has the edge on trade?

Last year, the U.S. ran a trade deficit in goods of $146 billion with the EU. To put that in context, America’s deficit with China was $347 billion. The deficit with Germany was $65 billion, marginally larger than the shortfall with Mexico.

3. How free is U.S.-EU trade?

After decades of talks, the U.S. and the EU apply relatively low average tariffs, on average less than 3 percent, on goods imported from the other side. Yet significant trade barriers remain, with each side applying different regulatory standards, making it harder to penetrate each other’s markets. For example, U.S. rules ban some European food products and cheeses. The EU stops imports of many beef-related products from the U.S. Before Trump’s election, the two sides spent about three years working on a new accord, the Trans-Atlantic Trade and Investment Partnership (TTIP), aimed at washing away many of these hurdles.

4. What has Trump done?

TTIP will probably be “put in the freezer,” according to a senior EU official. Trump is yet to fully show his hand on Republican calls for a border adjustment tax, which would target imports. Some European officials privately suggest that Trump’s relative silence on trade with the EU suggests there may yet be an opportunity to revive talks on a new accord. But his "America First" inauguration speech also stoked concern that U.S.-EU trade might get worse before it gets better.

5. What’s this ‘border adjustment tax’?

It’s a proposed rethinking of U.S. corporate taxes that would replace the current 35 percent corporate income tax with a “border-adjusted, destination-based cash-flow tax" of 20 percent. That means a company would pay taxes on imported goods and services, but not on exported ones.

6. What more could be coming?

Peter Navarro, the head of the White House National Trade Council, has said Germany is gaining an unfair advantage over the U.S. and other nations with a weak currency. And in January, Trump warned BMW AG that it could face stiff tariffs on vehicles produced in Mexico and shipped into the U.S.

7. How has Europe responded?

So far, there has been little concrete to respond to. Germany and France rebuffed American officials who floated the possibility of reaching bilateral trade agreements. German Chancellor Angela Merkel has vowed to stand behind free trade, while other European leaders hint that the EU could build alliances with China and Latin America should the U.S. close its doors. The shadow boxing stepped up when the Financial Times reported, on Feb. 13, that lawyers for the EU and other U.S. trading partners had begun preparing legal challenges to any proposed import tax.

8. Who would be the biggest losers from a U.S.-EU trade war?

Within Europe, Merkel’s Germany, the biggest European exporter to the U.S., followed by the U.K. and Ireland. American consumers might lose, too, since about 18 percent of U.S. imports come from the EU. Another big loser could be the U.K. consumer, the biggest user of goods imported from the U.S. Until it leaves the EU, Britain remains bound by the bloc’s trade arrangements.

9. Would there be any winners?

Protectionists argue that erecting barriers could lead to domestic job creation, as local firms fill the gap left by governments raising the price of imported goods. So, while economists tend to agree that free trade maximizes the benefit for the wider economy, some groups such as auto workers could benefit from rolling back globalization. The biggest winners might be lawyers, unleashing a wave of challenges to new trade barriers.

10. Doesn’t Europe have lots of other friends?

Yes. Canadian Prime Minister Justin Trudeau, for instance. The European Parliament approved a landmark free-trade agreement with Canada on Feb. 15, in what one lawmaker called Europe’s answer to Trump’s trade policy. Mexico and the EU said they will accelerate their discussions toward a new free-trade agreement, while the bloc has 20 other trade deals in the pipeline.

11. Is there reason for the EU to worry?

At this point, European officials and executives seem relaxed, viewing the new U.S. administration’s tough talk as little more than rhetoric, perhaps aimed at gaining concessions from China, Mexico and the EU. Tony Smurfit, chief executive officer of Dublin-based Smurfit Kappa Group Plc, one of the world’s largest box makers, told Bloomberg Radio that he expects “reason to prevail” on global trade. Still, if there’s one thing clear about Trump, it’s his ability to confound expectations.

The Reference Shelf

  • A graphic of the trade deals that really matter to the U.S.
  • Germany’s record trade surplus probably bothers Trump.
  • A QuickTake explainer on free trade and its foes.
  • A QuickTake Q&A on the border adjustment tax under consideration by the U.S.
  • Other countries "have a pretty sweet deal right now," says a congressman backing the border adjustment tax.
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