Great importance of the US market for Europe

An expansion of the trade conflict beyond the customs tariffs the USA recently imposed for steel and aluminium could leave a tangible mark on Europe’s economic development. Foreign goods trade with the USA is of central importance for Europe.

Last year, the surplus the EU member states booked in bilateral trade with the USA was about EUR 120 billion. Goods worth some EUR 375.5 billion were supplied to the United States, with goods valued at EUR 255.5 billion imported from there. In terms of the collective gross domestic product of the 28 EU member states the bilateral trade surplus with the USA comes to no less than 0.8 percent, compared to only 0.5 percent in 2008. Around 20 percent of total EU exports headed for the USA, while of total imports just short of 14 percent of US goods were destined for Europe. In terms of the share of imports, the USA thus placed second behind the People’s Republic of China.

Germany, as the largest economy in the European Union, also accounts for the largest slice of EU trade with the US. This is especially the case for exports. In fact, last year almost one third of EU goods exported to the USA came from Germany. Germany’s export-heavy economy thus contributed to an above-average degree to the EU’s positive balance of trade with the United States. The balance of trade surplus between the EU and the USA in 2017 came to about EUR 120 billion, with Germany alone contributing over EUR 50 billion of the figure.

In other words, from the German point of view the balance of trade surplus with the United States in 2017 was higher than with any other country. Germany exports clearly more goods to the USA than it imports US products. That is a thorn in President Trump’s eye. Since in first-quarter 2018 German exports to the USA have dwindled faster than imports from there, the balance of trade has already decreased by more than 5 percent. This trend is also reflected in export expectations of German industrial companies as polled by ifo Institut. Export expectations have been steadily falling since the end of last year, although the US government did not introduce its additional customs on aluminium and steel from the European Union until the beginning of this month. Alone the fear of a trade conflict has thus sufficed to dampen expectations.

Should additional obstacles to trade be erected, in particular carmakers and the aerospace industry, not to mention mechanical engineering and the pharma sector, could suffer. Indeed, German carmakers account for more than half the total EU exports of automobiles to the USA. In the case of medicines and chemical products, the share is likewise well above average. In the case of the German automotive industry, last year over 12 percent of total sector exports were destined for the USA, which is thus the most important destination for German car exports. The German automotive industry would therefore be accordingly hard hit by the possible introduction of US customs tariffs.

A trade conflict between the European Union and the USA would inevitably have a negative impact on growth in Europe and in Germany. Given weaker export expectations, corporations’ willingness to invest would probably decrease. Growth momentum – and it already dwindled noticeably in the first quarter – will therefore hardly pick up in the further course of the year. In other words, the growth figure this year will fall far short of the good result seen last year, when GDP rose 2.2 percent in Germany and no less than 2.4 percent in Euroland as a whole. We expect that Germany will achieve growth of 1.7 percent, while the Eurozone’s economic output is likely to rise by 1.9 percent in 2018.

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