New customs dispute between USA and EU: this could become expensive in the end

The US government has announced the introduction of new punitive tariffs against the EU. This time it is about „retaliatory tariffs“, which have even been explicitly approved by the World Trade Organisation (WTO) because of the banned EU subsidies for the aircraft manufacturer Airbus.

Customs duties on goods worth 7.5 billion euros are due to come into force in mid-October. The volume corresponds to the WTO decision, but the list of products subject to tariffs published by the US Department of Commerce came as a surprise. It is clear that the countries with Airbus production sites that are responsible for the subsidies in question will also be affected by the US tariffs. These are essentially France, Germany, the UK and Spain.

Although passenger aircraft are on the list as expected, they are only subject to a tariff rate of 10%. Aircraft parts or helicopters, on the other hand, are exempt from the new duties. Previously it had been assumed that all products of the aviation industry could be subject to tariffs of up to 100% (WTO ceiling). This has not happened, apparently because the US wants to avoid its own economic damage (e.g. US factories need parts from the EU).

Tariffs of 25%, on the other hand, are foreseen for other product groups that have nothing to do with the aviation industry. These tariffs are purely punitive for the countries involved. These include agricultural products such as cheese and wine, which are mainly intended to affect France and Spain, textiles (Great Britain) and tools (Germany).

For the German companies concerned, the penalty duty on certain tools is of course an unforeseen burden, as they are not affected by the controversial issue of „aviation subsidies“. From a macroeconomic point of view, however, the consequences should be limited, also because the tariff rate of 25% was chosen at the lower end of the possible range.

The question naturally arises as to why, on the one hand, large parts of the EU aviation industry were exempted from tariffs and, on the other hand, no higher tariffs were imposed on the US side. The reason is probably the threat of EU counter-tariffs. The EU, too, has a WTO case pending against US subsidies for the aircraft manufacturer Boeing. A verdict is expected for 2020, and here too a verdict of guilty is likely. This could lead to EU tariffs on US aircraft, and the EU would buy about three times as many US aircraft as vice versa. The potential damage to the already troubled US aviation group would therefore be considerable. Other products, e.g. from US agriculture, would probably also be affected.

The greatest danger in this dispute is that it could escalate further. Trump’s decision on car tariffs is already due in November. Both sides have apparently not yet come any closer in the negotiations. The imposition of punitive tariffs on EU car exports to the USA would be a severe blow for the German economy, which would hit it in an already difficult situation. But the measure is also highly controversial in the USA – probably a reason why Trump still hesitates.

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