Here's How the EU Will Punch Back Against Trump Trade Tariffs

(Bloomberg) -- President Donald Trump will decide by midnight Monday if the U.S. will slap permanent aluminum and steel tariffs on the European Union, inflaming trans-Atlantic tensions and raising the chances of a global trade conflict.

Washington imposed a 25 percent tariff on steel and 10 percent on aluminum products on March 23, saying the imports threatened national security. The EU, Australia, Argentina, Brazil, Canada, Mexico and South Korea were given temporary waivers, which are slated to expire on May 1.

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The EU and U.S. are the world's biggest economic partners, with two-way trade valued at 632 billion euros ($765 billion) for goods in 2017 and at 437 billion euros for services in 2016, according to the European Commission.

The commission, the EU's executive arm that coordinates trade policy for the 28-nation bloc, has already prepared a three-fold retaliatory strategy if the exemption isn't made permanent. This is how any dispute will likely play out with the EU, in this order:

Defensive Action

The EU on April 16 submitted a request to the World Trade Organization for consultations with Washington to determine whether and how the U.S. can compensate the bloc if trade flows into the EU are affected by the new tariffs. The talks are taking place under the WTO's Safeguards Agreement, which governs the use of temporary trade restrictions that members use to protect their domestic producers from a sudden surge of imported products.

The EU has argued that the U.S. tariffs are “essentially” safeguard measures, despite the fact that Washington said its actions were to protect national security. The U.S. refused to offer the EU compensation and said the request for consultations had no basis under WTO rules.

WTO Complaint

The EU also plans to join a separate WTO dispute against the U.S., arguing that the American tariffs violate the WTO's most-favored nation principle, which prevents countries from discriminating between their trading partners. This move could risk the stability of the multilateral trade system.

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The White House, which instituted the metals levies on national-security grounds, has argued that the WTO has no authority to adjudicate such matters because WTO rules permit countries to take “any action” to protect their “essential security interests.” If the WTO supports Washington's action then it could tempt more countries to bypass trade norms, citing security risks.

Tit-For-Tat Tariffs

The EU has said it would then introduce levies on 2.8 billion euros ($3.5 billion) of imports on iconic American goods in response to the proposed action by the White House. The bloc would be able to impose the retaliatory measures on June 21, 90 days after the U.S. levies took effect, according to an EU official with knowledge of the plans, who asked not to be identified because the discussions are private.

The EU tariffs would hit U.S. consumer, agricultural and steel products in many key Republican constituencies, putting pressure on Trump ahead of crucial midterm elections in November. Harley-Davidson Inc. and bourbon are both on the list of goods that could be hit, pressuring Republican speaker of the House of Representatives Paul Ryan, who hails from the Wisconsin home of the motorcycle maker, and Senate Majority Leader Mitch McConnell, from Kentucky, where the whiskey is made.

TTIP Lite?

U.S. Commerce Secretary Wilbur Ross has expressed interest in reviving talks on a free-trade agreement, a suggestion that has split the EU and may not be possible in the current environment. Before the tariffs were introduced, French President Emmanuel Macron said that the bloc “won't talk about anything while there's a gun pointed at our head.”

German Economy Minister Peter Altmaier took a more conciliatory approach over the weekend, saying steps should be taken to avoid a trade war and that the EU should put a free-trade offer on the table as a way to begin negotiations.

Ross also said last week that nations have been asked to accept import quotas in return for tariff-free access of the metals into the U.S. But that suggestion puts the EU in the difficult position of either succumbing to U.S. demands that could breach trade rules or face punitive tariffs. Forcing governments to limit shipments of goods violates WTO rules, which prohibit so-called voluntary export restraints. The demand is also contrary to the entire trade philosophy of the bloc, which is founded on the principle of the free movement of goods.

The European Commission has also tamped down hopes of revived trade discussions, saying that a dialog with the U.S. “does not represent the revival of the process for a comprehensive Trans-Atlantic Trade and Investment Partnership.” Negotiations on TTIP have been stalled ever since Trump entered the White House, decrying such multilateral trade deals.

--With assistance from Jonathan Stearns

To contact the reporter on this story: Bryce Baschuk in Geneva at bbaschuk2@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Richard Bravo

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