Europe Plans to Use the U.S. Election to Beat Trump's Trade War





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The European Union is legendary for moving slowly -- and that may be just the right pace for confronting President Donald Trump's trade wars.

While the daunting threat of U.S. tariffs on Europe's auto industry and other measures is very much alive, one line of thinking in the EU is that Trump will be less trigger-happy the closer he gets to the 2020 election. The logic is that he'd risk a voter backlash if the EU retaliated by targeting U.S. exports, notably farm products.

Right now, the awkward EU-U.S. truce is held together by the prospect of a big trade accord. To preserve the status quo, the proposal would slow-walk the negotiations, pushing them deeper into the campaign on the expectation that the Trump administration will be too focused on his re-election to escalate tensions with Europe, two European government officials said.

To convey the impression that talks are moving forward, the EU would make limited concessions on peripheral issues such as aligning regulatory standards, according to the officials, who asked not to be identified because the discussions aren't public. The bigger goal is a reset of trans-Atlantic relations after the election -- effectively a high-stakes diplomatic bet that Trump loses.

To be sure, the strategy carries an element of risk as Trump could always defy expectations and turn up the heat on the EU just as the election nears, unleashing more protectionist measures in a bid to play to his core voters.

The proposal, which is among a range of options floating around Europe and isn't official EU policy, coincides with a delicate transition at the EU's power center.

Incoming European Commission President Ursula von der Leyen, an ally of German Chancellor Angela Merkel, is signaling she won't back off the EU's forceful strategy of defending its commercial interests and upholding the global trading order.

Von der Leyen's plan is "to convince our friends from the U.S. that it's better to find a good compromise and work together," she said in an interview on July 16.

Tariff Toolbox

The U.S., which has shown a willingness to use a variety of mechanisms in an attempt to reduce its trade deficit, has already hit the EU with tariffs on steel and aluminum exports. The punitive measures were based on an obscure Cold War-era law that gives the president latitude to impose levies on grounds of national security, a justification rejected by the EU.

The EU retaliated with tariffs on about 2.8 billion euros ($3.1 billion) of politically sensitive U.S. goods from motorcycles to bourbon.

That barely scratches the surface of what the conflict could escalate into.

Trump has until November to decide whether to impose duties of as much as 25% on $350 billion in cars and car parts brought into the U.S. each year, outstripping U.S. tariffs he imposed on $250 billion worth of Chinese imports. The EU has earmarked 20 billion euros ($22 billion) of U.S. products to retaliate against.The U.S. has readied a separate list of tariffs on $25 billion of EU goods, of which it expects to hit $11 billion in retaliation for illegal subsidies the bloc provided to Toulouse, France-based Airbus SE. The Trump administration is waiting for the World Trade Organization to rule as early as this summer on the amount of damages. The EU has a similar case pending against Boeing Co. and has readied retaliatory tariffs.U.S. Trade Representative Robert Lighthizer has indicated that Washington could impose retaliatory tariffs or other trade limits on France or any other country that taxes digital revenues of large companies, which would hit tech giants from Facebook Inc. to Alphabet Inc.'s Google.

Agriculture Dispute

Some European officials view the U.S. tariff threats as an effort to force EU countries to include agriculture in the trade negotiations, which began after Trump and European Commission President Jean-Claude Juncker met at the White House last year.

The EU plan hinges on the extent to which Trump perceives that he needs to keep core voters in U.S. farm states happy, just as they feel the brunt of the trade conflict. China's retaliatory tariffs on U.S. farm goods have dented agriculture incomes and disrupted global trade flows, pushing American farmer sentiment to the lowest levels of his presidency.

As long as the trade war with China continues, the thinking is that Trump won't initiate a new front with Europe because the damage would be too severe for the U.S. economy and regional farmers, according to the officials.

In Washington, the two sides agreed to "work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods," then disagreed in public about what was said.

EU Trade Commissioner Cecilia Malmstrom said after the meeting last July that she was in the room and the outcome, "without doubt," was "that agriculture would not be in."

U.S. Ambassador to the EU Gordon Sondland has said the EU "misrepresented" the discussion. Juncker explicitly said agriculture would be included in the negotiations but that it would be left out of the public statement after the talks to provide the EU political cover, Sondland said.

(Updates with risk to the strategy in the fifth paragraph.)

To contact the reporters on this story: Richard Bravo in Brussels at rbravo5@bloomberg.net;Birgit Jennen in Berlin at bjennen1@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Tony Czuczka

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.

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