Yesterday, Donald Trump secured a major climb-down from the EU which has agreed to gradually create a trading environment with the US that is tariff free, non-tariff trade barrier free and subsidy free. Given that the EU has long pursued the use of non-tariff trade barriers even among close trading partners including the United States while European industries are among the most subsidised in the world, this represented an almost complete capitulation to Donald Trump in the face of large scale tariffs on EU goods along with the added threat of a 20% tariff on Europe auto imports to the American market.
While the EU could have stood up to the US in terms of getting a better deal on trade by leveraging its American partner via a new freer trading partnership with China, the leaders in Brussels predictably took the economically cautious/cowardly way out and instead capitulated to Washington rather than try to make the most out of a new trading relationship with Beijing while using this would-be relationship to maximise win-win concessions from the White House.
The extent of the European Union’s irrational fear over making new and freer trading arrangements with China was laid bear yesterday when White House National Economic Council Director Larry Kudlow stated that in their private discussions The EU Commission President Jean-Claude Juncker promised Trump a united anti-Chinese front. According to Kudlow,
“The US and EU will be allied in the fight against China, which has broken the world trading system, in effect. President Juncker made it very clear yesterday that he intended to help us, President Trump on the China problem”.
Hours later however, the US Senate defied the anti-Chinese economic tendencies of the US and EU Presidents by unanimously passing the Miscellaneous Tariff Bill which will either drastically reduce or fully eliminate tariffs on a number of imports, including and especially Chinese imports. The authors and supporters of the Bill have pointed out that many of the imports covered by Trump’s new tariffs do not have alternatives produced in the US. Likewise, many US based companies that manufacture their goods in places like China have advocated for the Bill which will not only help their own business interests but those of US consumers who do not want to bear the economic brunt of Trump’s protectionist onslaught.
As the pro-free trade bill has easily passed both the US House of Representatives and Senate, it remains to be seen if Trump will veto the bill in the name of protectionism. However, due to the overwhelming support for the pro-free trade measures on Capitol Hill, there exists a possibility that even if Trump decided to veto the legislation, Congress could override the veto in what would represent a dramatic blow to Trump’s flagship anti-Chinese policies.
Taken in totality, these recent events prove that while in Europe an irrational caution regarding freer trade with China is ingrained in the psyche of policy makers that continue to push for an economic “fortress Europe”, US policy makers aside from the President are generally far more modern in their approach to free trade.
In an economically interconnected world, tariffs on a major trading partner have the capacity to hurt one’s domestic industries and penalise one’s domestic consumer base far more than those in the country initially targeted by tariffs, or sanctions for that matter. The European Union saw this when anti-Russian sanctions helped the Russian agricultural industry to grow at unprecedented levels while European agricultural producers lost a lion’s share of their customer base.
Likewise, the anti-Chinese tariffs of the Trump administration have proved highly unpopular among most of America’s large, medium and small businesses while consumer advocacy groups have warned that for most Americans, the tariffs are nothing more but an excessive take on must needed items.
In this sense, the European Union has been doubly outdone by the United States. First of all, by limiting its own options due to entrenched scepticism regarding China, the EU had little other choice but to agree to a new trading agreement with the US on the terms first proposed by Donald Trump in a Tweet. Secondly, with the US Congress rebuffing a Sinophobic economic attitude that has been persistent in Europe for decades, including during an era where Sino-US trade flourished, Washington’s legislators have proved that for all of their faults they are still more forward looking and open minded when it comes to trade vis-a-vis their European counterparts.
Tariffs are taxes that punish American consumers and producers. If tariffs punish farmers, the answer is not welfare for farmers — the answer is remove the tariffs.
— Senator Rand Paul (@RandPaul) July 24, 2018
Taken in totality, while Trump has achieved what looks to be a good deal with the EU regarding trade, the US Congress is working simultaneously to calm Trump’s trade war with China. The result is something that may approximate a win-win for the US and a substantial embarrassment for the European Union.