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May 2, 2018 | Germany Seethes and Juncker Warns Trump About Tariffs: Can Trump Win?

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
In a hot air speech to the EU parliament, Juncker demanded permanent tariff exemptions from Trump. I ask “or what?”

Jean-Claude Juncker likes to make demands that are not his to make. Today we have another case of Juncker’s hot air: The EU Will Not Negotiate U.S. Tariffs Under Threat, said Juncker.

European Commission President Jean-Claude Juncker said on Wednesday the European Union will not accept threats in talks with the United States to secure a permanent exemption from U.S. import tariffs on steel and aluminum.

U.S. President Donald Trump has extended a temporary exemption for the European Union until June 1, although EU officials have said it is not clear what Washington wants.

“I would like to reiterate the call that this exemption be made unconditional and permanent. We consider that the U.S. measures cannot be justified on the basis of national security,” Juncker told the European Parliament.

“We will continue our negotiations with the United States, but we refuse to negotiate under threat,” Juncker said, while presenting the future EU budget plan.

Germany Seethes

There is no joy in Germany over this battle. They are increasingly frustrated by the fact that Trump wants bilateral agreements while the ECB wants to negotiate as a block.

Trump also wants quotas according to a White House statement: “In all of these negotiations, the administration is focused on quotas that will restrain imports, prevent transshipment, and protect the national security.”

Trump’s demands are particularly hard on Germany.

Eurointelligence Comments Yesterday

The EU’s exemption from his steel and aluminium tariffs for a final 30 days is good news. But the sense of relief is likely to be short-lived in view of the stated conditions for a deal. The EU, Canada, and Mexico, were all granted a final stay of execution while Trump granted a permanent extension to Argentina, Australia, and Brazil. All of these countries have agreed to steel and aluminium quotas.

Quotas are a nightmare for the Germans in particular because they fear that, once agreed, they will set a precedent for other products, cars included.

The US is fighting trade conflicts on several fronts now. The New York Times reports that China is taking a hard line on the two specific requests made by the Trump administration: to cut the US bilateral trade deficit by $100bn from the current $375bn, as well as limits to state support for advanced technologies like artificial intelligence, semiconductors, electric cars, and commercial aircraft, all part of the Made in China 2025 programme. Chinese officials were still betting on Trump’s readiness to make a deal in the end, but said the two sides are so far apart that there is no chance of a compromise any time soon. The Chinese say they are ready to reduce their surplus with the US by buying more high-tech US goods, but some of those were banned by the US from export to China.

If the US insists on quotas, the trade conflict could last for a long time.

Eurointelligence Comments Today

There is no joy after Donald Trump’s decision to give the EU another 30 days’ reprieve from the steel and aluminium tariffs. The big issue is the US demand for binding export quotas. This is poisonous for the Europeans. As Gabriel Felbermayr of the IFO institute noted, the problem with quotas is not in the short term, as exporters could limit their quantities while raising prices. But in the long run quotas are much more damaging than tariffs because they are inflexible. And, as we noted yesterday, if the EU were to agree to steel and aluminium quotas we would only be one step away from quotas on German cars.

German industry was scathing about Trump’s decision, on the grounds that it continues the uncertainty. FAZ quotes the steel manufacturers’ association in Germany as detecting the first signs of shifts in trade flows in the steel market, because the tariffs already affect China. The Germans fear that China is therefore beginning to divert its exports to the EU. Everybody in Germany seems to agree that the extension of the deadline is bad for business because it increases uncertainty. The European Commission yesterday noted drily that it took note of Trump’s decision, and that it would continue to refuse to negotiate under the open threat of trade tariffs.

Juncker Nonsense

The above discussion makes a mockery of Juncker’s demand for the tariff “exemption be made unconditional and permanent”.

Or What?

Exactly what can the EU do? A full blown trade war is the only answer I can come up.

Can Trump Win?

Suppose the EU agrees to quotas, which would heavily impact Germany. Does that mean Trump will have won?

Of course not. There will be no jobs saved in the US as a result. Instead, US consumers will pay more for cars and US businesses that use steel and aluminum will pay more for inputs.

A very destructive, full-blown trade war is the most likely consequence if Germany will not accept quotas. The alternative of higher prices for businesses and consumers is not “winning” either.

Mike “Mish” Shedlock

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May 2nd, 2018

Posted In: Mish Talk

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