Question

Research on President Trump’s recent proposed tariffs on imports from EU and explain the proposed plan in your own words. What do you think would be EU's reaction or retaliation to President Trump’s proposed tariffs? Justify your answer. It can be justified with historical examples in the past.

Answer 1

Tariff Policy Explanation:

To begin with, a tariff is a tax on import price of commodities aimed at reducing the import of home country. When President Trump imposed tariff on imports from Europe, the idea was to reduce the quantity of commodities being imported by USA from Europe. This is because, as price of imported goods go up, the demand for imports automatically reduces, resulting in achieving the desired effect.

Most recently, President Trump proposed on imposing an import tariff of 25% on steel and 10% on aluminium from all aluminium and steel exporting countries. For years, the US market was overflowing with steel and aluminium producers from abroad. The direct impact of importing cheap steel and aluminium benefits those industries using the two components as inputs. However, it largely displaces and adversely affects steel and aluminium producers in USA. Not only do they compete at ridiculously lower prices with foreign competitors, but most of them are driven to their shutdown points as they fail to recover costs incurred by selling steel and aluminium at the going rates. Therefore, a large number of people lose their jobs and although some of them do shift to other industries or take up part-time jobs, they lose their area of specialization and their efficiency reduces. A large portion of these out-of-business steel and aluminium producers also fail to get any job and remain unemployed. This was directly harming the US GDP and Trade balance. The biggest fear of US manufacturers is China, which supplies imports at the cheapest of prices owing to its comparative advantage in cheap labour and other resources. Repeated warnings were given to China as they went on dumping the surplus generated from their excess capacity at home, on USA. They ‘disposed off’ rather than sold all surplus steel and aluminium at lower rates of absurdity. This was putting USA under constant pressure and eventually to come out of this pressure, imports on steel and aluminium were issued. Since Europe also has a large chunk of exports in steel and aluminium to the US,it was badly hit by the tariff imposed, even though the main target was to get back at China. Nevertheless, considering how almost every commodity in the word is labelled “made in China”, apart from the steel and aluminium exporters of China, the country won’t be as severely punished as Trump wants it to be. China will make up for lost export earnings by penetrating deeper into other markets in USA. Europe’s export to USA on the other hand largely banks on motor vehicles, machinery, iron and steel, etc. It’s penetration in the US market is not as extensive as China’s. Thus, it has a lot to lose out on when the biggest buyer of their exports refuses to budge an inch.

EU’s Expected Retaliation:

Of course the European Union (EU) wouldn’t sit quietly and take it all in. One of the most important features of free trade is that ‘it makes both countries better off’. There are no clear winners or losers in trade. Thus, there are quite a few negative consequences of distorting free trade which go beyond creating market efficiency in that industry itself. Owing to government intervention and close political association with economic policies, ripple effects are faced by interdependent sectors. Firstly EU can hit back by imposing import tariffs on those goods for which USA is an exporter. If EU targets to impose a heavy tariff on that import commodity which constitutes the largeest share of USA’s export to Europe, then better results will be achieved with a sharp drop in USA’s exports to Europe. Unless the import being taxed is taking up a significant share in USA’s export market, not much difference can be made.

Secondly, the World Trade Organization (WTO) acts as a dispute-settlement body, often addressing concerns like the one in question. The EU could approach WTO and ask it to judge the fairness of such heavy tariffs on steel. If the verdict of WTO is in favour of EU and opposes tariff imposition, then either Trump has to withdraw the tariff or EU could retaliate in its own methods.

Justification of Expectations Regarding Retaliation:

These two expected retaliations can be justified on the basis of historical events because a similar situation had risen during President Bush’s term. In 2002, tariffs were imposed on steel. With immediate effect, the EU had in fact announced that it’ll impose tariffs on those particular goods that would affect USA’s exports the most. They exacted on certain industries which took up the largest share of USA’s exports to Europe and threatened to impose tariffs on those goods. The EU also approached WTO for judging the fairness of the tariff policy and the WTO relaeased verdicts in favour of EU. As WTO opposed steel tariffs, President Bush had to do away with tariff by the end of 2003. Thus, these time-tested methods of retaliation are what's expected to be EU’s response to Trump’s tariffs.