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The Washington Times reports No deal: EU resists Trump's zero-tariff trade offer, prepares new list of sanctions to add pressure.

President Trump offered European nations and other countries a zero-tariff deal as a way out of an escalating trade war, but so far he has no takers despite a zero-tariff agreement signed last week between the European Union and Japan.

The EU so far would rather fight than deal.

In retaliation against the Trump administration’s steel and aluminum tariffs, the EU imposed tariffs on $3.25 billion of American-made staples including bourbon and motorcycles.

EU Trade Commissioner Cecilia Malmstrom, who will accompany Mr. Juncker to Washington this week, said they will bring a new list of U.S. goods targeted for sanctions if Mr. Trump doesn’t back down.

The EU imposes a 10 percent tariff on passenger cars, compared with the 2.5 percent U.S. duty on European autos. A study by the CESifo Institute in Germany found unweighted average EU tariffs of 5.2 percent, compared with the U.S. rate of 3.5 percent.

“The EU is by no means the paradise for free traders that it likes to think,” Gabriel Felbermayr, director of the think tank’s Center for International Economics, told the German business newspaper Handelsblatt.

At last month’s meeting of the Group of Seven leading industrial nations, Mr. Trump floated the idea of zero tariffs to leaders of Britain, Canada, France, Germany, Italy and Japan.

Tariff-Free Proposal

“Ultimately that’s what you want. You want tariff-free, no barriers, and you want no subsides because you have some countries subsidizing industries, and that’s not fair. So you go tariff-free, you go barrier-free, you go subsidy-free. That’s the way you learned at the Wharton School of Finance,” said Trump.

That's correct. But Wharton also teaches that it's best to have no tariffs regardless of what the other guy does.

Wharton explains U.S. Import Tariffs: Why the Cost Will Be High.

The tariffs – 25% on steel and 10% on aluminum – will jeopardize U.S. ties with longstanding allies and raise prices of goods that use steel and aluminum, thus hurting demand, investment in factories and jobs on both sides of the equation, they warned. Retaliatory tariffs are inevitable, and the matter could face drawn-out challenges at the World Trade Organization, they said.

According to Ann Harrison, Wharton professor of management and business economics and public policy, the tariff move is “shocking,” both because few expected Trump to follow through on his threats to do so, and because it involved the closest allies of the U.S.

Desperate for a Deal

Eurointelligence says Germany is desperate for a deal. The rest of the EU? Not.

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In the political sphere, unlike other commentators we see no evidence that the German position on trade tariffs is prevailing at the EU level. The Germans are desperate to cut a deal with Trump. At the G20 meeting of finance ministers in Buenos Aires, Bruno Le Maire said France will not even negotiate with the US for so long as Trump maintains punitive tariffs on steel and aluminium. He says the EU would not negotiate with anyone who points a gun at them.

We don’t think that this comparison is just. The EU has been collecting more tariffs on cars than the US. If the EU refuses to talk, it would suffer a massive economic shock given its dependence on exports. We note a comment by Christine Lagarde in Buenos Aires who said global growth could be hit by 0.5 percentage points. We don’t think this figure capture the true dynamics of a trade war.

Over the weekend Trump has now widened his arguments in the trade conflict to include macroeconomic management, as he accused both China and the Eurozone of manipulating their currencies. This is a serious charge in the context of the US's own laws. If a country is deemed to be a currency manipulator, the president has the right to impose punitive tariffs, without having to resort to a national security justification as is currently the case.

FAZ is shocked to learn that Trump was now attacking the independence of the ECB. We note that a policy to devalue the euro and to eliminate fiscal deficits were central planks of the EU’s eurozone rescue strategy. There can be no question that these policies had an external impact on the rest of the world - which had to absorb the eurozone's now sizeable current account surplus. It is much harder to accuse the EU of unfair trade practices than to criticise its macro policies. For the former one would have to deep-dive into issues such as non-tariff barriers, but the macroeconomic imbalances are there for everybody to see.

In his FT column Wolfgang Munchau writes that the EU is not in a position to fight and win a trade war. The best strategy for the EU would be to take a two-pronged approach. First, take Trump’s trade tariffs on the chin, a decision that would benefit Germany and the Netherlands more than the other member states. The quid-pro-quo for such a policy would be a binding obligation on countries to reduce their current account surpluses to under 3% of GDP or thereabouts. With such a dual approach, the EU as a whole would gain. There would be no trade war. And the EU would finally start to address the underlying issues that gave rise to this trade war. Munchau concludes that he ultimately does not think the EU would take such action, as so far it has shown no inclination to solve the underlying issues, preferring to paper over cracks as they arise. 

Rather Fight Than Switch

No one is willing to back down. Not Trump, not the EU, not Japan, not China.

The 1960s Tareyton cigarette commercial comes to mind. The Tareyeton slogan was "Us Tareyton smokers would rather fight than switch."

I blended a couple of images together to create the lead-in image.

Munchau's conclusion is correct. The EU will not move to solve the underlying issues, preferring to paper over cracks as they arise.

Curiously, that must be.

Unsolvable Problem? Why?

  1. Because France will never give up its agricultural tariff policy.
  2. Bickering between France and Germany is on the rise. Germany is hurt far more than France over the auto squabble.
  3. This is not just a France-Germany issue. To make a treaty change, and tariffs are a treaty change, every nation in the EU must sign off on it. Re-read point number 1.

It took over a decade for the EU to negotiate a simple trade treaty with Canada. It nearly failed and took as long as it did because one country didn't like it.

Escalation Out of Control

Given the above, the most likely course of action is the trade war will escalate out of control.

Mike "Mish" Shedlock