More US customs duties threatened – will world trade now freeze?

The US President’s strategy has not changed at all. He continues to believe that reducing trade barriers is a fitting way of capping the USA’s large trade deficit. After introducing customs duties on solar power panels and washing machines he now plans to also impose penal tariffs on imports of steel and aluminium. He continues to insist that “there can be no free trade if some countries exploit the system at the expense of others.”

Just a few weeks ago a trade war, i.e. a race to impose import restrictions, was very unlikely. The trade agreements TPP and CETA – even though the USA is not part of either – were deemed to be a clear commitment to free world trade. But as a result of the US president’s latest decision the pendulum now threatens to swing in the other direction and the danger of an ice-age in international trade has increased visibly. If Donald Trump really imposes more trade sanctions next week, a chain reaction of retaliatory measures by the countries concerned could be just around the corner. Pressures on the world economy would be an earnest fear.

However, after five lean years in a row it was only last year that the increased momentum of world trade allowed global economic growth finally to climb visibly above the 3 percent mark. Thanks to the momentum of world trade that still exists today we expect this year will see global economic growth of around four per cent. Averaged out over several years, world trade is an important growth engine responsible for one third of global growth, and last year it made an even greater contribution to growth.

The braking effects of further penal tariffs from the US would naturally mainly affect America’s most important trading partners but they would also hit heavily export-dependent economies as a whole. Around 16 per cent of imported steel comes from the neighbouring country Canada. Beyond this, three quarters of all Canadian exports go to the USA alone!

For Germany the USA is still also the most important export partner after the euro area. Not only last year were around nine per cent of exported goods delivered to the United States. The share of steel and aluminium and of the products made out of them account for around three per cent of exports to the USA. So from the export point of view the direct repercussions of customs duties play only a subordinate role for the economy as a whole. The relative importance of steel exports to the USA is even smaller for the currency area as a whole.

These repercussions would, however, be exacerbated by second-round effects caused by a general slowdown in the world economy and there could also be major disruptions at the sector level: larger amounts of comparatively cheap global steel output would probably find their way into the European and thus also into the German markets, the competitive pressure for domestic producers would increase.

In the past few days not only Canada, China and the EU Commission announced retaliatory measures in the event of further penal tariffs being imposed by the US government. This would very probably hit the US farming sector with its strong export performance. In addition, it is doubtful whether the current renegotiation of the NAFTA agreement with Canada and Mexico will be continued at all in the event of further protectionist measures from the USA.

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