Trade War: The U.S. Gains Too Much from Europe to Risk It
(Bloomberg View) -- U.S. President Donald Trump's plans for a trade war aren't ostensibly focused on Europe, but Trump himself appears to think they are. He said on Tuesday that "the European Union has been particularly tough on the United States," making it "almost impossible for us to do business with them." Fact-checking Trump on this is pointless, but it's worth pointing out that the U.S. is on the verge of poisoning its favorite well for no obvious reason.
There is talk that Canada and Mexico could be excluded from Trump's planned steel and aluminum tariffs. If that's what happens, the steel tariffs will be the most damaging to Brazil, South Korea and Russia, which contribute 32 percent of U.S. steel imports. Germany, the biggest European exporter to the U.S., accounts for just three percent. The aluminum tariffs will hit Russia, the United Arab Emirates and China. Aluminum production is an energy hog, so Europe, where energy is relatively expensive, is not a major producer. But Europe has complained loudly about Trump's plans and plotted a deliberately insulting response, threatening tariffs on Levi's jeans, Harley Davidson motorcycles, bourbon and now also peanut butter, cranberries and orange juice. "We can also do stupid," European Commission President Jean-Claude Juncker said of the plan.
In a strictly economic sense, this is not Europe's war. Politically, though, it goes down well with Europeans when the EU stands up to the American bully. The European public's mistrust of the U.S. tendency to dominate relationships was, in a nutshell, what killed off the Transatlantic Trade and Investment Partnership when leaders on both sides of the Atlantic, including President Barack Obama and German Chancellor Angela Merkel, backed it. The EU bureaucracy has jumped at the rare chance to fight a popular war, and its media campaign has all the pent-up fury and cunning of a spurned partner in a divorce.
The U.S. would do well to cut Europe out of any tariff offensive and make the noise stop. Otherwise, it risks souring the best economic relationship it has with anyone in the world. On Wednesday, The American Chamber of Commerce to the European Union released the latest of its annual "Transatlantic Economy" reports, describing an economic symbiosis that forms the basis of today's global economy with $5.5 trillion in total sales by the European affiliates of U.S. firms and U.S. affiliates of European ones. "In the end," the report goes, "it is the U.S.-EU partnership that drives and dictates global trade, investment and capital flows, with no commercial artery in the world as large as the investment artery forged between the United States and Europe."
This is a better description of what's going on than Trump's "almost impossible to do business" comment, just as foreign affiliate sales are a better measure to describe the relationship than the divergent trade numbers. They show how comfortable the respective markets are for each other's businesses.
The balance is in favor of the U.S. The output of American companies in the EU, at $720 billion in 2016, significantly exceeded that of European ones in the U.S., $584 billion. Europeans, meanwhile, spend more on research and development in the U.S. than Americans in Europe -- $41 billion vs. $31.3 billion in 2015. By these important measures, the U.S. is a net beneficiary of the relationship; even much of the trade imbalance is explained by the activity of U.S. firms: Almost 60 percent of U.S. imports from the EU are "related party" ones, meaning the goods are produced by U.S. companies. For Asia-Pacific nations, the share is just 40 percent.
It should be obvious even to Trump that trade is only part of an overall business relationship. From a European perspective, this relationship is skewed toward the U.S., especially when it comes to multinationals' tax shenanigans. Thanks to them, intellectual property royalties paid out of Ireland -- mainly by U.S. tech -- as a way to shift profits have averaged 23 percent of that country's economic output between 2010 and 2015. If there's a sucking sound to be heard, it's actually in Europe, not in the U.S.
No trade war has started yet: Trump is playing to his supporters, EU officials to Trump-skeptical European audiences. But if a war, even a minor one, does start, bad blood will rise quickly. Europe does have the means to hurt U.S. multinationals, even if it's not doing much now. If Trump cares about the U.S. economy's pillars, he should cherish European lenience -- and get off the EU's back.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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