The European Union and United States are among the closest allies in the world. Since the end of the second world war, the two sides of the Atlantic have remained being close. They are all members of the G10, G20, NATO, and OECD among other organizations. This stability has helped the business between the two sides grow.
However, for more than three decades, Donald Trump has talked about how the European Union takes advantage of the US. He has argued that the bloc was formed specifically to compete with the US. He has also condemned the region for using the US on defense. As members of NATO, members are required to spend at least 2% of their annual budgets on defense. However, wealthy countries like Germany spend a very tiny amount of their budgets on defense.
As such, last year, the US president started sending signals that he was hoping to start imposing tariffs on imported cars from the EU. This would be a major thing because of the volumes the region exports to the United States. Estimates say that the region would lose more than $10 billion every year. To some extent, Donald Trump has a point. This is because when the EU exports cars to the US, they receive a tariff of just 2% but when the US exports cars to the EU, they are met with a tariff of 25%. This makes it difficult for American companies like General Motors to compete.
Yesterday, it was revealed that the US was moving to impose tariffs on European goods worth about $11 billion. This is because of a ruling by the World Trade Organization (WTO) that the EU gave Airbus illegal subsidies in a case that has been going on for more than 15 years. The new tariffs are a bit small based on the volumes the two regions trade. Last year alone, the two regions did business worth more than $800 billion.
However, the tariffs come at a difficult time for the European Union. In recent months, data from the region has been significantly weaker than what the market has been expecting. In fact, countries like Italy have been in a recession.
There is also speculation that Donald Trump will turn his trade war to the European Union after he secures a win with China. In fact, he has announced that a deal with China will come in the next four weeks. Coincidentally, he is legally allowed to determine whether he will tariffs on European cars in that period.
The key issue with Donald Trump is the increasing trade deficits with the EU. The deficit has grown from about $68 billion in 2007 to more than $160 billion in 2018. However, critics argue that additional tariffs are unlikely to reduce the deficit. This is because Americans are the ones that will shoulder these tariffs. Indeed, after he imposed tariffs on Chinese goods, the US deficit reached the highest level in more than ten years.
Therefore, there is a likelihood that the euro and EU stocks will weaken slightly in the next month as a decision on tariffs is expected.