“Is the end of the trade conflict between Europe and the US good for the economy?”

Published on: 4 November 2021

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert provides a clear answer to the question of the week. This time: chief economist Thijs Knaap on what the end of the year-long trade dispute between the US and the EU means for our economy.  “It is a step in the right direction but the bigger picture around trade is globally negative.”

The trade war unleashed by US President Trump partly ended on 31 October 2021 - the fight with China is still in full swing, but on the US-European front tempers have calmed somewhat.  The conflict began on 1 June 2018 with the introduction of import tariffs by the US - 25 percent on steel and 10 percent on aluminum from the European Union, among others. The EU did not let that move go unanswered and raised import tariffs on a large number of US products from 5 percent to 31 percent. In addition to steel and aluminum, this also included products like motorcycles, cranberry juice, whisky, shoes and clothing.

With the suspension of these EU tariffs (which, additionally, were to be doubled on 1 December 2021) and the removal of a substantial portion of the US import duties on European steel, the hatchet seems to have been buried. How will we notice this in our economy?

Dirty steel

Knaap: “An economist is not happy about import tariffs, because they protect a country's industries artificially, which leads to inefficiency. If a country with a certain industry cannot compete in the world market on its own, it is better to import those products from countries that can make them cheaper. Economically, it is always better if everyone focuses on what they do best. In this respect, the recent agreement between the US and the EU is good news. At the same time, it is only a step in the right direction. Because the bigger global trend is that continents are actually sealing off their markets.”

And according to Knaap, it is not like all trade barriers between the US and Europe have disappeared. “The Harley-riding bourbon drinker can breathe a sigh of relief, because the import duties on it will disappear completely. But the Americans are more reticent when it comes to steel: the import duty will only disappear for a certain quantity of steel. Moreover, the US and the EU have indicated that they no longer want ‘dirty steel’. That may have to do with the environment - steel from China has a bigger ecological footprint - but they seem to be doing it mainly to protect Western producers from cheaper Chinese steel.”


Confrontation with vulnerabilities

Knaap is referring to the agreement that steel must be produced entirely in the EU/US trading bloc in order to qualify for duty-free status. This should prevent Chinese steel from undergoing the final minimal processing in Europe before being exported to the US.


“Protecting the Western world” seems to be related more to a strategic pursuit of independence than to protecting jobs. Knaap: “During the pandemic, countries were confronted with their vulnerabilities. Masks, for example, had to come from China, it was difficult to get respirators, and so on. People reconsidered whether they wanted to be dependent on others for such strategic products. Steel is a particularly strategic product, especially in military terms. China, too, aspires to this independence - as do Europe and the USA - and wants to be able to manufacture aircraft, cars, microchips, etc. itself. In any case, this will not lead to the protection of national jobs - one of Trump's political promises before the introduction of import duties on steel. Employment in the US steel industry first saw a modest upturn from 82,000 to 88,000 during the Trump administration, but then fell again and is now back to 82,000. Moreover, in the 1980s, it still employed 200,000 people. And this decrease has everything to do with increasing productivity per employee through automation. That effect is much stronger than that of an import tariff.”   

The real problem

The geopolitical factor, then, is where - from an economic point of view - the real problem for the global economy lies. “It is becoming more and more important. There is less and less understanding of globalization and trade in goods. Globalization is also less and less popular with politicians. As an economist I prefer to see it differently. It is certainly a sign of the times that we’re going to put more and more partitions between different parts of the world. So yes, the effect of ending the US-European trade conflict on the economy is positive, but limited. The larger trend shows declining economic globalization. That’s always inefficient and inconvenient. It’s at the expense of jobs and it will have a negative effect on global trade.”