The real price of a new EU-US trade war

Last month, trade commissioner Cecilia Malmström told European trade ministers that if President Trump hits the EU with 25 per cent tariffs on cars, Brussels is prepared to hit back with tariffs on some $20 billion worth of American exports.

Trade wars don’t involve the outright destruction of military action, but both kinds of conflict put political ambitions and vested interests ahead of human welfare. And though the damaging effects of trade wars are not always immediately apparent, make no mistake, they are numerous, deep and extensive.

In March, President Trump reiterated his intention to impose tariffs on cars and car parts from the EU should the two parties fail to arrive at a comprehensive deal. The US Commerce Department had previously submitted a report to the White House in mid-February, concluding that Trump could justify the tariffs on national security grounds.

As with military intervention, what matters is an outcome, not a justification. If the US imposes a 25 per cent tariff on imported EU cars and parts, it would mean higher prices for US consumers and, ironically, damage the American car industry, which depends on imported parts. By the same token, if the EU retaliates, it will end up hurting not only US exporters, but European consumers too.

Protectionists, however, haven’t been very creative in their reasoning. One of their key motivations is rooted in the idea that tariffs protect  domestic industries. The EU has been extremely successful in employing this argument. Export subsidies pushed through the Common Agricultural Policy (CAP) were initially developed to guarantee high prices for European farmers, offset by import levies. Protecting farmers was the ostensible aim of the CAP.

What policymakers didn’t see, however, was that the CAP resulted in excess supply from national producers, coupled with a lack of demand from domestic consumers. What’s more, once the CAP was fully implemented in 1967, imports from the US covered by new tariffs declined by 40 per cent.

Did the policy achieve its goal of protecting European farmers? Certainly. Did the policy’s gains outweigh the costs? Absolutely not.

The cost of protectionism is consumer choice, or what economists call ‘welfare loss’. That basic insight seems lost on most policymakers, perhaps unsurprisingly when they face well-organised industry lobbyists with deep pockets and political influence. The prospect of possible job losses in a particular region or industry is always likely to weigh more heavily on a politician’s mind than the more widely dispersed benefits of free trade.

The agricultural industry is a case in point. European farmers know what they stand to lose if the EU opens its market to agricultural imports from across the pond. In much the same way, the US car industry knows it would suffer from proper competition with European car giants.

But do we as consumers know what we would lose and what we could potentially win with a more liberal trade policy? When was the last time we truly noticed an imported cheap good in the store?

Should the US impose a tariff and the EU retaliate, it’s likely most of us won’t even notice that we’re in a trade war. However, the US-China dispute demonstrates amply that, just as with real wars, those fought with tariffs do not have winners.

The latest data suggests that the trade war with China has cost American consumers $20 billion and US exporters $16 billion. Both the US and Chinese economies each lose about $2.9 billion annually because of Chinese tariffs on soybeans, corn, wheat and sorghum alone. It’s a stark reminder that trade wars not only hurt the side that starts it, but also the one that retaliates.

As with every war, it is often assumed that threats and acts of aggression, in this case, tariffs, will bring about victory – certainly that seems to be Trump’s view. Ultimately, however, they always end up causing destruction. Simply put, there is no argument for protectionism that justifies its impact on all of our welfare.

As in the Prisoner’s Dilemma, both parties are better off if each chooses to cooperate. In this case, the EU and the US will both win if instead of seeking to sucker their opponent, they work together on a mutually beneficial trade deal.

Maria Chaplia is a media associate for the Consumer Choice Center.

Originally published at

Trump’s Free Trade Suggestion remains Unheard

During European Commission president Jean-Claude Juncker’s visit to Washington D.C, Donald Trump once again suggested a tariff-and subsidy-free trade area between the European Union and the United States. Yet, the American president continues to fall on deaf ears, for reasons that tell more about the EU than it does about ominous ‘Trumpism’.

The meeting in Washington seemed to have a positive announcement within, as both parties agreed on an end to tariffs, non-tariff barriers, and subsidies on non-auto related industries. In a joint press conference, both parties announced that the European Union would increase imports on liquified natural gas (LNG), as well as American soybeans.

The European Union Commission returned to Brussels in a self-congratulatory manner, claiming to have avoided a trade war. And yet, with the exception of free trade no non-auto industrial goods, as well as vague promises on avoiding retaliatory trade measures triggered by tariffs on steel and aluminium, the meeting was unproductive. The import of soybeans cannot be increased simply through a Commission president statement: there are no EU tariffs on soybeans, and if companies in Europe don’t magically decide to buy them, then literally is expected to change. On LNG, the story is comparable: the European Union has already been promoting LNG for years, and the press conference just reiterated that point.

Politico Europe conveniently called the whole process “The art of no deal“.

Juncker’s effort to charm Trump into believing that he scored a victory is sad, in comparison to the actual opportunity that President Trump presented to the EU. Not only did Trump repeat during Juncker’s visit in D.C that he’d prefer a free trade deal with Europe that’d exclude all kinds of tariff-barriers, he also repeated the said statement in a tweet on Thursday:

However, if Juncker were to actually claim to walk in the footsteps of statesmen such as Robert Schuman, he’d embrace full free trade. In trade between rich and poor countries, both sides benefit, because they pay less for products, capital goods (machines, computers, etc.), and highly specialised labor. While it is true that job losses can occur when competition increases, it is important to account for increases in exports through free trade. The German car producer Mercedes might not like the competition of Italian cars on the German market, but since many Italians purchase his product, it’s manifestly more profitable to freely trade.

Protectionism is purely ideological because it is based on sentimental beliefs. If we were to take nationalism out of the picture, it would be difficult to argue that international free trade would be disadvantageous while domestic free trade (say, between cantons or provinces) is advantageous. This is particularly true in large trading blocs such as the European Union or, for that matter, the United States.

Tariffs are nothing more than a useful tool for the reactionary extremes of the right and left wings of the political spectrum. This is all the more visible in the sense that whenever Trump addresses the idea of freeing trade relations from all government intervention, nobody bothers to even address it.

Trump’s free trade suggestions remain unheard, because the solutions of subsidising or protecting through standards are immediate and popular. The European Union doesn’t follow an ideological line on free trade, it merely pretends to do so for the efficacy of political point-scoring.

The solution on trade isn’t “somewhere in the middle”. The idea that we’ll import some American products here and there, in order to get temporary concessions on some of our goods, is unproductive and hurts consumers. The only answer Jean-Claude Juncker should give when Donald Trump suggest completely free trade between the two continents is “yes please”.

Free Trade For Us is a single-issue campaign produced by the Consumer Choice Center and supported by partners to raise awareness about the positive impact of free trade and to show policymakers all over the world that the millennial generation is united against tariffs, trade barriers, and retaliatory measures that only hurt consumers and workers.