RaboResearch - Economic Research

Storm in a tea cup or first step towards a transatlantic trade war?

Economic Report

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  • The United States has slapped tariffs on USD 7.5bn worth of EU export goods in retaliation for illegal subsidies to Airbus
  • From a macroeconomic standpoint, the gross domestic product (GDP) losses are likely to be limited, given that only a small part of total exports are targeted
  • Across sectors and countries, however, the impact is distributed unevenly. Germany is expected to incur the largest losses of gross value added (GVA), especially in heavy-industrialized sectors like machinery and equipment; computers, electronic and optical equipment, and the aerospace sector (Airbus). In France, the aerospace sector is expected to face GVA losses, but the beverages industry (e.g. wine, spirits) is also likely to feel the pinch
  • The positive impact on GVA in the US aerospace industry is smaller than expected, possibly because Airbus relies heavily on US-produced intermediates
  • Overall, we find a slightly negative impact on the US economy as the tariffs reduce (European) demand for other non-tariffed goods 
  • In the Netherlands, the F&A sector, i.e. food products, meat (pork) and dairy (cheese, yoghurt), are expected to face the largest GVA losses, while some industries, e.g. aerospace and beverages, might benefit from export substitution effects
  • Although tensions over trade are building between the US and the EU, we think there is little chance that the current dispute or further frictions down the line will result in a full-fledged trade war between both sides of the Atlantic

In this economic report, we assess the potential impact of higher US tariffs on USD 7.5bn worth of European Union (EU) export goods, which will be effective from mid-October. The sectoral vulnerabilities for individual EU countries are calculated using the GTAP sectoral trade model. We also discuss whether this protectionist move by the US should be regarded as a one-off event which ultimately settles a dragging quarrel between Airbus and Boeing, or could potentially be the first step towards a transatlantic trade war.

US slaps duties on USD 7.5bn worth of EU exports

On 2 October, following a long-running dispute, the appellate body of the World Trade Organization (WTO) ruled that European airplane manufacturer Airbus has received illegal subsidies. As a result, the WTO authorized the United States to impose retaliatory tariffs of 100% on USD 7.5bn worth of export products from the EU. After the ruling, Washington responded that it would move quickly to ensure that the tariffs will become effective as early as 18 October, but would at the same time limit the magnitude of the tariffs, ranging from 10% to 25%. The list of goods released by the Office of the US Trade Representative (USTR) shows that the Administration will slap additional duties on for example airplanes, agricultural products (such as cheese, olive oil and flowers) and industrial products. The package is especially aimed at hurting the four countries of the Airbus consortium: Germany, the UK, Spain and France. But other European countries are targeted as well, as the US underlines that the EU is “collectively responsible for the illegal subsidies” to Airbus. Early 2020, the WTO will also announce the magnitude of a protectionist package that the EU may impose as retaliation for unlawful subsidies to US airplane manufacturer Boeing.[1] In anticipation of that ruling, the EU has already proposed a retaliatory tariff package targeting USD 20bn on US export goods.

Frustrating an overarching deal?

The tariffs could have been avoided if both sides of the Atlantic had reached out to settle the dispute, but instead the US and EU blame each other for not taking any action. The increased tensions come at a time when negotiators on both sides are carefully trying to find common ground to launch talks on an overarching trade deal.[2] For over a year, the EU and the US have been in disagreement whether to include agricultural products in such a deal. The most recent move might frustrate a swift and successful start to these negotiations even further. We will return to this subject later in this report.

Mapping trade between the EU and the US

In order to get a better understanding of the vulnerabilities of European exporters to protectionist measures by the US, we take a closer look at the distribution of the exporting industries. Table 1 shows the main sectors that are targeted in the USD 7.5bn package. Note that some of these sectors have a relatively high share within total EU-US trade. This is especially the case for transport equipment (including aviation), beverages, and machinery and equipment.

Table 1: Total exports from major EU countries (millions) and exports to the US (as a share of total exports to the World)
Table 1: Total exports from major EU countries (millions) and exports to the US (as a share of total exports to the World)Note: See the Annex for more information on the sectoral breakdown. The latest version of the GTAP database includes data from 2014 and therefore 2014 is the starting point of our simulation. Based on realized data from OECD, we are able to construct estimates of the various economic variables in 2019.
Source: GTAP, Rabobank

Assessing the economic impact using GTAP

To analyze the economic impact of the tariff increases, we employ a standard GTAP model and the latest publicly available version of the GTAP database (version 10 with base year 2014). The underlying database accounts for the initial equilibrium of the global economy. The GTAP model uses a global input-output table with trade data between all countries. It is used by many international organizations to assess the impact of trade policy changes on the global, regional and national macro economy at the sectoral level. 

We distinguish 17 goods and services sectors, and 33 countries and regions (see Annex I). The US and EU-28 countries are modelled separately, so we can distinguish the impact of the tariff increase per EU country. The sectoral aggregation reflects some of the main goods that have been targeted for the US tariff increases. We use the specific targeted products identified in the official USTR document, which uses the Harmonized System (HS), at the 8-digit level. Combining this data with the concordances between the HS and the GTAP sector classification, we calculate the sectoral trade-weighted average tariffs which are levied on roughly USD 7.5bn worth of goods exported from the EU to the US. For instance, we know that the US is implementing higher tariffs on aircrafts, but GTAP does not provide a disaggregated breakdown of the sector other transport equipment into boats, trains and aircrafts. Therefore, we apply a trade-weighted lower tariff on the total sector as a proxy to isolate the tariff impact on the aerospace sector.[3] We assume that the tariff hike shocks will be fully realized in 2024, and that the global economy will subsequently return to a new equilibrium.[4] The resulting counterfactual scenario is then compared with the baseline in 2024 to obtain the potential economic effects of the tariff shock.

The asymmetric impact of the USD 7.5bn package

Macroeconomic impact

The overall macroeconomic impact of the US protectionist package announced is very small (Table 1). Germany is expected to incur the largest GDP losses, but these effects are still very limited: -0.004ppts in 2024.

Figure 1: Macroeconomic impact is negligible
Figure 1: Macroeconomic impact is negligibleSource: Rabobank, GTAP
Figure 2: Package targets only 1.7% of total EU exports to US shores
Figure 2: Package targets only 1.7% of total EU exports to US shoresSource: IMF DOTS, Macrobond, Rabobank

Some countries are likely to benefit due to export substitution effects, such as Austria, China and Brazil, but these effects are also very small. The negligible macroeconomic impact is of course due to the limited size of the package (of USD 7.5bn) compared to total EU exports to US shores (USD 480bn, Figure 2) or the overall EU exports to the world (USD 6,468bn).

Sectoral impact: export and GDP

As the protectionist package is targeted at specific products and countries, the economic impact is distributed unevenly across sectors within European countries. For the largest economies within the EU, Figure 3 shows a list of industries that are expected to face the largest exports losses in that specific country due to the higher tariffs. Due to worsening competitiveness, machinery & equipment exports from the UK are expected to be 2% lower than in our baseline situation of no additional tariffs. But olive oil companies in Spain and Italian companies producing cheese are also projected to lose market share vis-à-vis the baseline situation.

Figure 3: Export per sector in percentage change versus the baseline, 2024
Figure 3: Export per sector in percentage change versus the baseline, 2024Source: GTAP, Rabobank

GDP impact

With respect to the impact on gross value added (GVA), our calculations show that Germany is expected to face the largest economic losses (compared to our baseline situation) in heavy-industrialized sectors like machinery and equipment (-0.6%); computers, electronic and optical equipment (-0.6%), but also the aerospace sector (Airbus) and electrical equipment (Figure 4). In France, the aerospace sector might face GVA losses (compared to our baseline) of 0.7%, but the beverages industry (e.g. wine, spirits) is also likely to feel the pinch (Figure 5).

Figure 4: Sectoral GVA impact in Germany
Figure 4: Sectoral GVA impact in GermanyNote: the GDP impact is expressed as the percentage change vis-à-vis the baseline in 2024
Source: GTAP, Rabobank
Figure 5: Sectoral GVA impact in France
Figure 5: Sectoral GVA impact in FranceSource: GTAP, Rabobank

The impact in the UK (Figure 6) is felt mainly in two sectors: machinery and equipment (-0.8%) and the aerospace sector (-0.6%). In the US (Figure 7, the protectionist package has a positive impact on GVA growth in several industries. The ones most likely to benefit are machinery and equipment, dairy, and vegetable oils and fats, although the overall impact is limited. The positive impact on the US aerospace industry is smaller than some would perhaps have expected. One should however take into account that higher tariffs are also weighing on several US manufacturers that are currently supplying intermediate products to Airbus. According to a statement, 40% of Airbus’ aircraft-related procurement comes from US aerospace suppliers. This underlines our findings that countries initiating higher tariffs also partly bear the brunt via a disruption of integrated global supply chains.

Overall, the total US economy will indeed lose out slightly, as the negative economic impact on the European economy due to higher prices (as a result of the higher tariffs) also spills over to lower demand for other US goods (Figure 7). As this sector is far more substantial than the sectors that show a small plus in additional production, an overall limited net negative impact on the US economy is the result.

Figure 6: Sectoral GVA impact in the UK
Figure 6: Sectoral GVA impact in the UKSource: GTAP, Rabobank
Figure 7: Sectoral GVA impact in US
Figure 7: Sectoral GVA impact in USSource: GTAP, Rabobank

For the Netherlands, the F&A sector will face the largest losses due to the USD 7.5bn tariff package (see Box 1 for a detailed assessment by Rabobank’s Food & Agri Research team), although the overall GVA impact (vis-à-vis our baseline) is not expected to exceed -0.2% by 2024, which is mild to say the least. More specifically: food products, meat (pork) and dairy (cheese, yoghurt) might face the largest GVA losses. However, there are also some Dutch industries which might benefit slightly, mainly on the back of the export substitution effects. These sectors are the aerospace sector, machinery and equipment, and beverages. To see how this works for the aerospace sector, let us give an example. The higher tariffs on aircrafts will result in a demand shift towards manufacturers that do not face the tariffs that the US has implemented, e.g. Boeing, Lockheed Martin, Bombardier. Due to this demand impulse, there is a possibility that these companies will also increase their demand for Dutch-manufactured intermediates, as the Netherlands has several companies operating on that front.

Figure 8: Sectoral GVA impact in the Netherlands
Figure 8: Sectoral GVA impact in the NetherlandsSource: GTAP, Rabobank

Box 1: The impact on the European F&A sector

According to the RaboReseach F&A report: A Hard Landing for Some, European exporters of wine, olive oil and dairy products will be impacted most by the US trade tariffs. The impact on Dutch F&A appears to be limited to very specific meat and dairy products. A large impact on the Dutch agricultural sector is not expected, because The Netherlands is not a significant producer of wine and olive oil. Some Dutch dairy products, mainly cheeses, are targeted by the tariffs. However important cheese types such as; Gouda and Edam are excluded from the tariffs.

What to expect?

The million-dollar-question is: should the latest protectionist move be seen as a one-off which settles matters in a long-dragging dispute between two large aviation companies across the Atlantic, or as the first step towards a transatlantic trade war, similar to the escalated trade tensions between the US and China.

Irritations and tensions between the US and the EU over trade have been building since the Trump Administration imposed tariffs on steel and aluminum in May 2018 and in the wake of it threat to levy duties on European cars. A further escalation was averted after President Trump and then EC President Juncker released their Joint Statement to work on a new trade deal in 2018. So far, however, both parties have been struggling to find common ground to start their talks, mainly because of disagreement whether to include F&A products in the deal. The latest protectionist move by the US in the wake of the Airbus ruling is exemplary for the fact that both countries are not able to resolve their disputes diplomatically. In the short term, there are some events which could well put additional strains on the transatlantic relationship.

Upcoming events that could provoke tensions include, for example, the WTO ruling in the case against Boeing next year. The WTO has already announced that Boeing also has received unlawful subsidies, but an arbitrator still has to determine the scale of a fair retaliation package, which will probably be made public early next year. Until the EU has green light from the WTO to impose retaliatory tariffs in the Boeing case, we deem it unlikely that the EU will reciprocate the US protectionist package that will become effective on the 18th of October. In addition, the US are blocking the reappointment of WTO appellate court judges. This December, the term of two judges will come to an end and no new judges have been reappointed. This will paralyze the appeal system. Critics claim that Trump is undermining and hampering the WTO because of its power to overrule US law. Moreover, a vast number of countries have petitioned the US to allow the reassignment of judges, signaling their displeasure with the current impasse. Finally, the US Commerce Department finished a report earlier this year investigating whether automotive imports are a threat to US national security. President Trump has stated that the report concludes that US auto imports indeed pose a threat, but the report has not yet been officially published. A formal decision has been suspended until 13 November, but President Trump might already use the report as leverage in the trade negotiations with Europe. More importantly, if the US did indeed decide to impose import tariffs on cars and parts coming from Europe, the EU would probably retaliate.

Full-fledged trade war not most likely course just yet

Despite the above, for now we do not expect a full-fledged trade war between the EU and the US. For a start, the tensions between the US and the EU are of a completely different nature to the US-China trade war. As stated in several reports (here and here), the US-China trade war is not just about the large deficit that China runs with the US, the violation of intellectual property rights (IPR) or the exorbitant subsidies by the Chinese government to state-owned companies, it is rather a geopolitical power struggle. Secondly, the Trump Administration is well aware that the US economy will be much worse off if it starts a trade war against Europe (see here and here). Finally, President Trump probably does not want to upset financial markets much further.

Annex

Table A.1: Sectoral breakdown
Table A.1: Sectoral breakdownSource: GTAP

Footnotes

[1]  There is a slight chance that the decision on Airbus gets overturned by a compliance panel and there is also a small chance that the absence of judges in the WTO panel could scupper the decision on Boeing, but the assumption we have made here is that these legal/technical issues will not derail this process.

[2]  On 25 July, President Trump and EU President Juncker released a Joint Statement in which they agreed to work together toward “zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”. Moreover, both parties agreed to reform the WTO.

[3]  We are aware that by making this assumption we are not able to fully isolate the impact of the tariffs on the specific products, but it does allow us to estimate substitution effects between sectors and narrow down the impact on the most disaggregated sectoral level available.

[4]  The latest version of the GTAP database includes data from 2014 and therefore 2014 is the starting point of our simulation. Based on OECD data, we are able to construct estimates of the various economic variables in 2019 and 2024 respectively.

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Author(s)
Hugo Erken
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2223 1650
Kan Ji
RaboResearch Netherlands Rabobank KEO
+31 6 8329 1678
Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936
Michiel van der Veen
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 8313 4616

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