The United States and European Union are two of the closest allies in the world. The two regions cooperate on so many fronts on the world stage. This changed when Donald Trump became president of the United States. For decades, he had accused the region of being anti-United States. He also believes that the reason the EU was formed was to be on par with the US.
Part of the reason Donald Trump accuses the EU of being a threat to the US is its trade surplus. In 2018, the US exported goods worth more than $575 billion and imported goods worth more than $684 billion. This created a trade surplus of more than $109 billion. On services, the US exports were $452 billion while imports were $196 billion. This means the surplus on the US side was more than $60 billion. In the US, business with the EU creates more than 2.5 million jobs.
Last year, Donald Trump held a press conference with EU’s Jean-Claude Juncker where the two made a truce on trade. The two sides decided to make a way for negotiations. However, more than ten months later, nothing much has happened.
The US has already completed a review on whether the automobile imports from the European Union were a threat to national security. For months, he has promised to put tariffs on these imports. The reality is that such tariffs will be harmful to American auto companies. This is because, the two largest US automakers, GM and Ford, usually manufacture overseas. Meanwhile, European automakers like BMW and VW have large plants in the US. In fact, the biggest BMW plant in the world is located in the US. Also, the biggest exporters of cars to the US are Mexico, Japan, and Canada.
Fortunately for the EU, Trump has been distracted by the Mueller probe, the failing trade talks with China, and the trade deal with Japan. However, the EU is also divided, especially after the Brexit delay. In addition, Germany and France have been at loggerheads. France has insisted that agriculture should not be part of any transatlantic negotiations, something that is of close importance to the US. In the US, Finance Committee Chairman, Chuck Grassley has said that any deal that does not include agriculture will not get to Congress. At the same time, Germany, which exported cars worth more than 27 billion euros to the US last year is concerned about the automobile threat than protecting European farmers.
As shown below, while the DAX index has made some gains this year, it has showed some weaknesses in the past few weeks. As shown on the hourly chart below, the 25-day and 50-day moving averages appear to be crossing over while the RSI has been on a sharp decline. The index will likely continue declining as the trade rhetoric heats up.