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US-Europe dispute threatens main artery of world trade

Carlo Piovano and Lorne Cook
Associated Press

Brussels — The trade wars threatening to push the global economy into recession are entering a new phase, with the United States and European Union escalating a dispute that endangers the world’s biggest trade relationship.

After the Trump administration slapped steep tariffs on $7.5 billion in EU goods, mainly traditional produce like cheese and wine, the Europeans made clear they would retaliate in kind. Some fear the tariffs could ultimately lead to U.S. taxes on European cars, a big economic blow that Trump has been threatening to deliver for months.

FILE - This May 6, 2016 file photo shows the logo of the Airbus Group in Suresnes, outside Paris. The World Trade Organization says the United States can impose tariffs on up to $7.5 billion worth of goods from the European Union as retaliation for illegal subsidies to European plane-maker Airbus — a record award from the trade body.

The exchange echoes how the U.S. and China ratcheted up a tariffs fight in recent months that has bruised businesses around the world and stunted economic growth.

“This step triggers fears of a new round of escalation of tariff wars,” said Alex Kuptsikevich, a financial analyst with brokerage FxPro. “The introduction of tariffs and fears of tit-for-tat steps could further suppress business sentiment, which is already at the lowest levels for years.”

The Trump administration’s latest tariffs target large aircraft but also many typical European products such as olives, whiskey, wine, cheese and yogurt. They will take effect Oct. 18 and amount to a 10% tax on EU aircraft and steep 25% rate on everything else.

The U.S. got the legal go-ahead Wednesday from the World Trade Organization in a case involving illegal EU subsidies for the plane maker Airbus and which predates the Trump administration.

But the EU is expecting a similar case involving U.S. subsidies for Boeing to go in its favor, with a ruling due in coming months.

It has said it hopes the two sides can hold off new tariffs, which economically amount to taxes on domestic importers. Sometimes importers pass on the higher costs to consumers, making goods more expensive.

“If the U.S. imposes countermeasures it will be pushing the EU into a situation where we will have to do the same,” said European Commission spokesman Daniel Rosario, echoing the dark outlook expressed by many EU governments.

“This is a move that will first and foremost hit U.S. consumers and companies and will make efforts toward a negotiated settlement more complicated,” he said.

A group of American alcohol importers, wholesalers, distributors and others released an open letter this week urging an end to the tariffs. They say tariffs on Scotch whiskey, liqueurs and wine would affect nearly $3.4 billion in imports and cost 13,000 U.S. jobs, including truckers and bartenders.

Mindful that the tariffs do not actually come into effect for a couple weeks, Rosario stressed that the EU is still open to talking.

The tariffs come on top of ones that the U.S. and EU exchanged last year and multiply the headaches for European businesses fretting over Brexit, which could see Britain leave the EU on Oct. 31 without a deal — meaning new tariffs overnight on the heavy flow of trade across the Channel.

More broadly, the tariffs add to uncertainty for the global economy, which has been hit particularly hard by the U.S.’s wide-ranging dispute with China over trade and technology.

The U.S. and European economies are more closely integrated than the U.S. and China, with companies heavily invested across borders, so the potential damage from an escalation could dwarf the dispute with China.

Total U.S. investment in the EU, for example, is three times higher than in all of Asia. And EU investment in the U.S. is eight times that invested in China and India combined. The two sides account for about half of the world economy.

“If it weren’t for the wider trade war, everybody would kind of shake this off and say it’s just business as usual under WTO rules,’’ said Edward Alden, senior fellow at the Council on Foreign Relations. “In the current context, it’s going to be hard to contain. The Europeans feel like their economies are under assault by the Trump administration.’’

The EU is not allowed to retaliate against U.S. sanctions approved by the WTO. But the 28-country trade bloc has shown a willingness to stretch the rules when it comes to responding to Trump’s aggressive trade policies, Alden said.

For example, Trump last year imposed tariffs on steel and aluminum from the EU and other countries, claiming they were a threat to U.S. national security. The WTO gives countries wide leeway to decide their own national security interests, so Trump’s move appeared to pass muster with the Geneva-based trade monitor. But the EU lashed back with retaliatory tariffs on U.S. products anyway.

Rising uncertainty over one of the oldest and biggest economic trade paths would further darken the outlook for exporters and manufacturers, which are already cutting down on investment.

Bob Bauer, president of the New Jersey-based Association of Food Industries, which represents around 1,000 food importers and exporters worldwide, said his members are angry that food is being targeted in a dispute over aircraft subsidies.

“We’re going to be paying so that Boeing and Airbus can continue to receive these subsidies,” Bauer said, adding that many food importers are small, family-owned businesses that can’t absorb a 25% tariff because food has low profit margins to begin with.

The head of the Spanish Federation of Food and Beverage Industries, Mauricio García de Quevedo, said the new U.S. tariffs will make it harder for the companies he represents to compete internationally. And that will contribute to job losses, he said, without providing detail.