EU could win trade war with US
The EU, on July 28, came to an agreement with the US that set base levies on EU goods at 15%, below the 30% rate US President Donald Trump had threatened, though still much higher than tariffs were before the trade war began.
Many analysts and journalists alike are adamant that the trade deal the EU struck was a big win for the US and a major loss for the EU. Even French Prime Minister Francois Bayrou seems to think so.
The main thrust of the argument is that the EU should have been strong enough to inflict measurable pain on the US, but instead made lots of promises without getting much in return. Plus, some European leaders are concerned that their exporters will suffer from lower US demand in the short term.
Allow me to disagree and state that, as it stands today, the EU is winning the trade war.
First, let us compare the EU trade deal with the agreement that one of Europe's major competitors, Japan, struck with the US just five days earlier.
Both countries were hit with a baseline tariff rate of 15%, and both made much-derided promises to boost investment in the US. While Europe's total pledge is larger in nominal terms, it only represents around 7% of the EU's GDP compared to over 13% for Japan.
The numbers clearly suggest the EU got a better deal than Japan, even without accounting for the fact that Japanese businesses depend more on exports to the US than their EU counterparts.
Moreover, neither the EU's promised US$600 billion investments in the US nor the purchase of $750 billion in energy commodities is arguably a real concession. Over the last three years, EU businesses have invested some $605 billion in the US, so investing another $600 billion in the next three years would likely have happened regardless. And as Reuters Open Interest columnist Clyde Russell explained, it is delusional to think the US can deliver $750 billion in energy commodities to the EU in the next three years.
On top of this, modelled projections of the impact of the tariffs on the US and other countries suggest that, based on the announced tariff levels, the US will suffer more than the EU both in terms of GDP and inflation.
Over the next 12 months, my model -- which is a global trade model that considers the dynamic relationships between trade, growth, inflation, and foreign exchange rates -- forecasts a 1 percentage point (pp) increase in US inflation and a 0.4 pp decline in GDP growth. The Yale Budget model anticipates a similar hit to GDP, but it anticipates a larger 1.8 pp boost to inflation.
Meanwhile, my model indicates that in the next 12 months, the impact on EU inflation and growth should both be in the order of 0.2 pp to 0.3 pp. In short, the EU appears set to suffer less from the new tariff regime than the US in the next year.
And in the medium term, the EU could very well be a net winner from this new trade environment, as new supply chains are established in response to the higher global tariff environment. In fact, my model indicates that, based on the tariffs currently announced, the EU's GDP could actually increase by around 0.1 pp compared to a no-tariff scenario.
Why? Because China and several other economies like India, Brazil and possibly Switzerland face much higher tariffs than the EU, which could allow EU exporters to gain market share from these international competitors.
After all, US businesses and consumers who cannot replace imported goods with domestically produced ones will seek to find the cheapest possible imported good. And while Chinese imports tend to be cheaper than those from Europe, they will now come with much higher tariffs, eroding China's price advantage.
Some recent economic data releases suggest these model forecasts could be onto something. Consider new manufacturing orders in recent PMI surveys. In the US, they crashed in April after rising in the first quarter due to businesses front-running tariffs, and they continue to hover well below the crucial 50-point mark denoting expansion and contraction. Meanwhile, in the EU, this indicator has accelerated and remains well above the levels seen in the US.
Where does that leave us? Sentiment in the EU following the trade deal appears to have become too negative, while investors simultaneously appear too complacent about America's economic prospects. This sounds like where we were at the beginning of the year, right before Europe started outperforming. Reuters
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