Trump’s $7.5 Billion Victory Could Cost Trillions

On October 3, President Donald Trump tweeted, “The U.S. won a $7.5 Billion award from the World Trade Organization against the European Union, who has for many years treated the USA very badly on Trade due to Tariffs, Trade Barriers, and more. This case going on for years, a nice victory!”

Trump was referring to the WTO (World Trade Organization) decision on Airbus. On October 2, the WTO stated that the EU was subsidizing Airbus, which didn’t align with WTO principles. This subsidy has affected Boeing’s (BA) aviation market for the last 15 years. The United Kingdom, Germany, France, and Spain were the main providers of these subsidies to Airbus.

Trump’s $7.5 Billion Victory Could Cost Trillions

Trump’s new trade war

According to the October 2 statement by the Office of the United States Trade Representative (or USTR), “The United States today has requested that the WTO schedule a meeting on October 14 to approve a U.S. request for authorization to take countermeasures against the EU.”

Notably, the EU can’t retaliate like China for WTO-approved countermeasures, and the EU cannot appeal. The Trump administration is empowered to impose tariffs up to 100% over “affected products” at any time. However, the USTR decided to impose a 10% tariff on civil aircraft. Agricultural and other products would be subject to a 25% tariff.

Plus, Trump appears to have opened a new front in the tariff war. In a September 3 tweet, he warned the EU about unfair trade practices. The timing of this decision might adversely impact the global economy, and business investment decisions could be impacted around the world.

According to IHS Markit data, world real GDP could be reduced by 0.8% and 1.4% in 2019 and 2020, respectively. Moreover, this model assumes a “protectionism scenario.” In nominal GDP terms, this decline could worth over $1 trillion. 

US-EU trade details

In 2018, the total trade between the US and the EU was $1.3 trillion. Moreover, the trade deficit for the last year was $109 billion. US top exports to the EU comprised aircraft, machinery, oil, and optical and medical instruments. Total exports in these categories were $46.5 billion, $34.2 billion, $28.5 billion, and $27.7 billion, respectively. So, the EU is a very important market for Boeing, and the WTO’s ruling could benefit Boeing’s stock price.

Moreover, US agricultural exports to the EU totaled $13.5 billion, as the EU is the third-largest market for US farmers. In 2018, US exports to the EU grew 9.2%. Also, US exports of goods and services to the EU represented 2.5 million workers in 2015.

Last year, EU exports to the US grew by 9.1%. Germany exported goods worth nearly $125.9 billion. The United Kingdom, France, and Italy’s exports to the US totaled $60.8 billion, $54.7 billion, and $52.5 billion, respectively. Machinery, pharmaceuticals, and vehicles are the top product categories of these exports. The trade value of these categories totaled $80.2 billion, $71.9 billion, and $56.4 billion, respectively.

The EU is a more important market for Boeing than the US is for Airbus (EADSY), based on trade flow data. Based on vehicle import figures, US car manufacturers such as General Motors and Ford could see their stock prices react to Trump’s new tariff war on the EU.

Trump and Europe

On October 10, trade representatives plan to meet in Washington, DC, for the US-China trade talks. Reportedly, Trump is optimistic about trade talks. However, Larry Kudlow, the director of the National Economic Council, is not sure about the deal. Kudlow believes that years could pass before a resolution can be reached.

In addition, Trump’s aggressive policy against China could further subdue this growth rate. The White House is examining various options, including an investment curb in China.

In Q2 2019, Germany’s GDP contracted by 0.1%, pressured by the US-China trade war. Germany is the largest economy in the European Union. On September 6, German Chancellor Angela Merkel noted during a two-day visit to China, “We hope that there will be a solution in the trade dispute with the United States since it affects everybody.”