Fed up with US trade tactics, Europe eyes its own escalation

[BRUSSELS] Europe's relationship with the US has been stretched to the limit by US President Donald Trump's "America First" foreign policy. But disputes about aircraft subsidies and car tariffs coming to a head over the next two months could put the allies in a trade war.

And while transatlantic relations have been fraying since Mr Trump came to office more than two years ago, the European Union's (EU) political calculus has changed, with the bloc considering taking a more aggressive stance towards the US, according to officials familiar with the EU strategy.

"Europe is cornered and has to fight back," said Hosuk Lee-Makiyama, director of the European Centre of International Political Economy in Brussels. "The problem is that the EU doesn't have that much ammunition. There are no good policy options left for the bloc."

Renewed hostilities between the EU and the US would mark a reversal since Mr Trump and European Commission President Jean-Claude Juncker agreed to a cease-fire last year. That agreement suspended the threat of a cycle of tit-for-tat tariff retaliation that was triggered by controversial US duties on imported metals and that, if resumed, would threaten to put more pressure on a tepid world economy.

EU retaliation

There's no shortage of tensions: Washington is blocking appointments to the World Trade Organization's (WTO) appeals board, which will render the body inoperative in December; controversial US duties on Spanish olives pose a threat to Europe's system of farm aid; and Mr Trump's threat to hit cars and car parts with tariffs would affect the US$191.7 billion in passenger vehicles and light trucks the US imports each year.

But the game changer could be tariffs on another nearly US$8 billion of European goods the US is expected to impose as soon as October in retaliation for illegal EU aid for planemaker Airbus SE.

It is this issue that has prompted Europe to weigh a more aggressive posture. Mr Juncker's commission, whose five-year term ends on Nov 1, is considering imposing tariffs on more than US$4 billion of US goods in retaliation, and using as justification an unrelated 22-year-old dispute over now-defunct American tax breaks. This is despite the fact that the two sides reached a "mutually acceptable solution" to the issue in 2006.

"For the EU, the risk of a conflict with the US is higher now than it was a year ago," researchers Anabel Gonzalez and Nicolas Veron said in a Sept 16 paper published by the Bruegel think tank in Brussels.

New strategy

The idea is being driven by the EU's desire for a negotiated settlement with Washington over aircraft aid and by concerns that, from the political point of view, the bloc may be unable to afford delaying retaliatory action. EU efforts to resolve the issue through talks have failed to bear fruit.

The possibility of hastier European countermeasures in the aircraft-aid dispute reflects EU exasperation with the Trump administration's belligerence in transatlantic trade matters generally, according to an official from the bloc.

The idea amounts to scraping the bottom of the barrel of what the EU can conceivably do legally to strike back at the US as soon as possible, according to the person who spoke on the condition on anonymity.

No decision has been taken and the idea could face resistance in some EU national capitals including Berlin. Aside from causing economic harm, such a move would risk undermining the EU's claim to be working to uphold the WTO system that Trump's protectionism is shaking.

The outcome of the EU deliberations on this issue could depend on the incoming leadership team at the Brussels-based commission, the bloc's executive arm, and in particular on the designated trade chief, Ireland's Phil Hogan, who is currently European farm commissioner.

"It may come down to how gung-ho Phil is," said Lee-Makiyama. "The fundamental reality facing the whole EU political establishment is that there is no real appetite by European industry in general for tariffs against the US."

BLOOMBERG