Global equities and other risk assets, such as AUD, NZD, CAD, NOK and SEK were all hit this morning on the news that the US is weighing whether to hit the UK and EU with tariffs on another $3.1bln in imports.
The US Trade Representative wants to impose new tariffs on European exports like olives, beer, gin and trucks, while increasing duties on products including aircrafts, cheese and yoghurt, according to a notice published late Tuesday evening, reported Bloomberg.
The Bloomberg article added that the plans could hurt European luxury brands such as Givenchy, Hermes, Remy Cointreau and Pernod Ricard, as well as LVMH.
To state the obvious, rising trade barriers between the US and EU are seen as a negative not only for the companies whose products will be hit with tariffs, but also for each country’s respective economies. Tariffs typically discourage trade, decreasing the choice of products available to consumers and increasing prices – all negatives for economic growth.
When you see risk assets being hit by rising trade tensions, this is a reflection of the negative impact that higher trade barriers have on economic growth expectations.
Current State of US/EU trade relations?
The US and EU have been engaged in a 15-year long trade dispute with the World Health Organisation over aircraft subsidies – the EU claims that the US unfairly subsides Boeing, which hurts Airbus, while the US claims that the EU unfairly subsidises Airbus, hurting Boeing.
The WTO delivered a victory to the US back in October, allowing them to impose tariffs on $7.5bln worth of EU imports. US Trade Representative Lighthizer has in the past sought to increase the “pain” on Europe by employing a “carousel” tactic; where the tariffs are rotated between good to increase uncertainty over what will have tariffs on it next.
Next month, the WTO is expected to deliver a victory to the EU for its case against illegal US subsidies of Boeing, with the EU likely to be allowed to place tariffs on up to $11.2bln of US imports. Today's reports of the US mulling a further $3.1bln in tariffs might be a US attempt to dissuade the EU from actually placing these tariffs on US imports.
EU Trade Commissioner Hogan recently noted that “the US has stepped back from settlement talks in recent weeks… if this remains the case, the EU will have little choice but to exercise its retaliation rights and impose our own sanctions”.
So then, add US/EU trade tensions back to your list of things to worry about.
With Trump falling in national polling (today’s latest poll had him trailing Biden by 14%), he may get more aggressive on the trade front leading into the November election. This could put further downward pressure on risk assets.
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