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Trade War Without End: Bush-Era European Trade Spat Gives Trump New Tariffs

This article is more than 4 years old.

China dominates trade war headlines, but one trade dispute has recently racked up a win for President Trump. The Disruptor-in-Chief managed to get the World Trade Organization to hand Europe a loss. Now they have to pay tariffs to sell certain goods to the U.S.

Trump isn’t much of a fan of the WTO, but the multilateral trade organization said last week that Washington was right about France’s Airbus. It’s China-light, helped by subsidies the trade body deemed unfair for Boeing.

It took them long enough.

The 15-year dispute was started by George W. Bush, questioning subsidized loans to Airbus that finally led the WTO to grant the U.S. permission to impose tariffs on roughly $7.5 billion worth of European goods per year starting on October 18. The decision includes a relatively small 10% tariff on aircrafts and a punitive 25% tariff on wine, cheese, pork and scotch.

The EU also has their own qualms with Boeing subsidies and that dispute’s timeless is about six months behind. So countervailing duties on the U.S. could occur over the next 9 to 12 months, unless the two sides reach a deal.

The implication of additional tariffs will be closely watched by investors as consumer spending has been the driving force of this late-stage economic expansion. Higher prices may put a damper on the consumer story, a story that’s led the S&P 500 this year. Upending all that depends on the trade situation.

“Political turmoil in modern history has had a limited long-term impact on the markets, volatility often increases in the short-term. A review of market performance around such events suggests that markets were less sensitive to the political upheaval and reacted more to economic events,” Glenmede investment strategists led by Jason Pride wrote in a note to clients on Monday. They warn that this time around, trade may be the external event that continues to determine the underlying trend in the markets, making market direction and political uncertainty more entwined than in the past.

Europe has been a distant second front in Trump’s trade war. But Europe has been his first real win, even though he didn’t initially pull the trigger on Airbus.

If you wonder why Trump doesn’t try the same with China, one look at just how long it took for the WTO to rule on this and it is clear. If Washington waited that long to get China to change its mercantilist policies, Beijing might as well control the world’s supply chain. It’s almost there as it is.

Trump’s chief trade negotiators, led by Robert Lighthizer, will meet with their Chinese counterparts on Thursday. It’s unclear if talks will take place following Washington’s decision to put dozens of new China tech companies on an entity list that bans them from using certain American made computer components.

China seems to be growing impatient, anyway.

“The fact that China has indicated it wants to narrow the scope of the trade talk means that we are headed for a deal on agriculture and manufacturing and a fig leaf for the rest,” says Sebastian Galy, senior macro strategist for Nordea Asset Management in Luxembourg. “Both sides need a deal.”

Trade-related headlines will continue to be a headwind for markets.

It’s already a headwind for Europe.

The age-old Airbus dispute does not make things any easier on a fraying European economy.

Monthly PMI data for the euro zone shows a slump in Germany continues.

As a result, the WTO is cutting its forecast for world trade growth in 2019 to just 1.2%. The International Monetary Fund, ahead of the annual meeting with the World Bank on October 14, is likely to do the same. The IMF has been bemoaning the trade war’s impact on global growth since the first quarter.

Meanwhile, two thirds of euro zone bonds have a negative yield. Terrible for savers who are forced into cash, dividend yielding equities, or riskier foreign bonds, like Russian debt, of which many European bond fund managers are actually overweight despite all the noise about Russia being a bad actor in the region.

Trade tensions, Brexit, and the end of a business cycle aren’t necessarily new to the market anymore. Negative interest rates, on the other hand, are new. Investors are just starting to understand what they mean.

“Investors and some central bank policy makers are now recognizing that negative rates do more harm than good,” says Neil MacKinnon, economist with VTB Capital in London.

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