Why Scotch Tariffs Have More to Do With China Than You Think

(Bloomberg) --

U.S. tariffs that took effect on Friday on iconic European products including single-malt Scotch whisky have already prompted plenty of grumbling from American consumers. But the more important constituency watching what might yet turn into a 21st century Whiskey Rebellion is actually in Beijing.

President Donald Trump’s attack on some of European Union’s boozier exports is the result of a long-running fight over the industrial leg-up the U.S. and EU countries have given to Boeing and Airbus over the years. In a world where dirigiste China’s vast web of corporate subsidies from cheap electricity to cheap capital are the target of concern on both sides of the Atlantic, a fight over their own subsidies undermines the ability to join forces.

The trans-Atlantic fight over aircraft subsidies, which led the World Trade Organization this month to authorize U.S. tariffs on $7.5 billion in imports from the EU, is therefore tied intricately to Trump’s prospects of someday extracting a far more meaningful set of economic reforms from President Xi Jinping than the mini deal he is now contemplating.

The EU over the past 10 days has again proposed talks with the U.S. to resolve their differences over the aircraft saga. It is pointing to the shared angst over China as the best reason for the two economic powers to cut a deal. Which seems sensible. Even Boeing isn’t keen on the tariffs ostensibly being levied in its interest for fear they will lead to retribution and its aircraft being shut out of the European market.

So far the response from Robert Lighthizer, the U.S. trade representative, has been a shrug of the shoulders.

Lighthizer is busy wrapping up the first installment of the deal Trump is determined to close with China by mid-November. But U.S. officials are also skeptical of how real any EU commitment to end subsidies would be. For a start, people in Washington point to the billions in loans European governments extended to Airbus to develop the A380. With the jet’s demise, those taxpayer-backed loans are effectively being forgiven, which is seen as evidence of Europe’s lingering affection for state support.

There is one good reason to be optimistic. The EU and the U.S. — together with Japan — have for almost two years been working on draft rules for industrial subsidies that they hope someday to take into the WTO as a way to force change in China.

The Trump administration has never been overly enthusiastic. But people close to the talks say a text is being finalized. The big stumbling block: The need for a resolution to the Airbus-Boeing fight.

Which is why it’s worth tracking the price of single-malt Scotch in the U.S. — and Brexit could play a role. But if the new tariffs disappear (and prices go down) it will most likely be because of a bigger peace and a new alliance forming against China.

Charting the Trade War

The French port of Calais has spent 6 million euros preparing for the fallout from Britain’s tortuous journey out of the EU. It may all end up being pointless, but none of the towns and cities along the continental coastline of Northern Europe can afford to take any chances. 

Today’s Must Reads

• Asian bellwethers | Exports in Japan and South Korea have extended their declines, the latest signs the trade war is continuing to slow big engines of the global economy.
• Collateral damage | Malaysia may become a target of sanctions as the export-reliant economy is caught in the crossfire of the U.S.-China trade war, its prime minister said.
• Status update | South Korean trade officials will discuss the country’s developing-nation status at the World Trade Organization with American counterparts this week.
• Pork lift | Export sales of American pork soared to an all-time high as buyers stock up in anticipation of a widening protein gap created by a pig-killing disease in Asia.
• Chips are down | The U.S.-China trade war is fracturing the world’s semiconductor manufacturing base, and that won’t stop even if the tariffs cease to exist.

Economic Analysis

• South Korea outlook | The trajectory of trade tensions continues to shape South Korea’s growth outlook in 2020. 
• Japan trade pain |  A 10th monthly drop in exports underscores the blow to manufacturers from slowing external demand.

Coming Up

• Oct. 24: Hong Kong trade balance
• Oct. 25: CPB releases Global Trade Monitor

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net, Zoe Schneeweiss

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