Another Day, Another Trade War

- will this one be any different from the last

Published on March 2, 2004 By Solitair In Current Events

I woke up yesterday, read my newspaper and noticed tht March had arrived and another US-EU trade war was upon us. After over 2 years of waiting for the US to recind it's illegal trade subsidies the Eu had finally acted. 5% extra tariffs were added to a diverse range of US products including paper, toys and jewelry. And for every month that the US fails to recind it's illegal subsidies the traiff rises by 1%.

So where has this problem come from. Well long before the steel trade war the Eu took the US to the World Trade Organisation court over the subsidies it gives to Us companies who trade in foreign countries. Companies such as boeing could set up a foreign sales corporation and would be exempt from paying US taxes (or local taxes) despite the product being produced in the US. The WTO rules this illegal and gave the EU permission to levy tariffs.

So now tariffs have started, but at a very low level. Only about $190M at the moment. Assuming the US fails to recind the laws this will rise to $660M within a year. Buts that is jsut the tip of the iceberg. The WTO has granted the EU permission to levy 100% tariffs on $4B worth of US products and China and other members are threathening to also follow suit.

So why has the US not backed down? It folded very quickly in the steel dispute and that was only over $2B worth of tariffs. Some would say the reason is probably because of the way the EU targetted those immediately against products from key election states. Perhaps the EU should have done the same here? Others (especially in the US) argue that the president has asked congress to change the law and congress is the problem. Whatever the cause the gradual increase in Eu tariffs is likely to make sure this is a long war, with the US only backing down when the costs get too high. It probably hopes this will be after the election and not beforehand.

For the moment, the weakness in the US dollars masks the effect and US exporters are unlikely to see any pain for the next few months.

Paul.

Comments

Draginol

on Mar 02, 2004

The reason the US backed down quickly on the steel tarrifs is that that only required an executive order.

By contrast, this other issue is more complex. It has to do with the US tax laws. It's not an intentional subsidy,it's just a loophole in the US tax law that some companies have made use of. The problem is that it's going to take time to come up with a different system that everyone can agree to.

I mean let's be real here, when it comes to subsidizing, the Europeans are kings of it. But they have been better at getting the WTO to not rule against them. Ever looked at how Airbus is funded? Or the farm subsidies? The Europeans certainly can't wear the white hats either.

In both cases, they are things that weren't designed to thwart the WTO, they were created because of domestic politics.

JEPEL

on Mar 02, 2004

Good to read you again Solitair.

I'm not sure what to think about WTO, the US and EU are subsidising a lot of thing and use generally the WTO to open poor country market but kept their market protected.

At the end of the day, US and EU are always in commercial war, either cold or warm.

Solitair

on Mar 03, 2004

The sooner the EU abolishes farm subsidies the happier I'll be! There goes 50% of the EU budget every year! I agree with start-up incentives (to generate industry), short term market protectionist measures (to protect in crisis like BSE), but totalyl disagree with any subsidy which creates an unviable market. Both the EU and US need to scrap the majority of their farm subsidies and the sooner this happens the better. Just think of all the things that money could be spent on!

As for the latest trade war I do indeed realise that the problem is with the US tax system. The EU gave the US over 2 years to come up with a solution and to try to change the law. Nothing happened. Let's be honest here, Congress has no desire to change the law and hence the situation we are now in.

The EU isn't helping matters either by gradually applying tariffs. It's not going to give a sense of urgency. $190M is nothing as far as trade goes. Congress is not going to change the law until that cost gets too high. In my opinion the Eu should have slapped on all $4B of trade subsidises. Congress would have very quickly come up with a solution.

As for the WTO. It does do a fairly good job. The EU lost it's case on Bananas and is likely to lose the case on genetically modified foods. The US lost the case on steel tariffs and on off shore sales tax havens. Neither the EU or the US are going to take each other to court on farm subsidies as those are exempt for another few years.

As for Airbus. Germany, France and the UK have agreed to provide low interest loans to Airbus to develop it's new super Jumbo. Boeing claims this breaks a 1994 WTO rule, Airbus claims it doesn't. The question is whether the low interest on these loans is a subsidy. The loans themselves are not. The US should file a complaint with the WTO if it really believes this is a breach.

Paul.

Sherye Hanson

on Mar 03, 2004

Boeing's problem isn't Airbus. Boeing's problem is Boeing. Boeing gets a lot of government subsidies of all different kinds.

Draginol

on Mar 03, 2004

Specifically? What?

Solitair

on Mar 04, 2004

I think boeing and airbus both get the ultimate subsidy ... 'favourtism from their respective governments in bids'. It's well accepted in Europe that a defense contractor needs an American partner to compete for US government contracts. This means that the military sides of Boeing and Airbus have distinct advantages in their home territory which could be considered as 'subsidies'. Europe is also beginning to move this way with effect on local economies now a valid consideration in defense contracts.

Indeed the EU argues that Boeing's military subsidies to develope new military aircraft for the US government were what allowed it to develop it's commercial jets in the first place. From the 1970's to 1992 the EU governments did indeed subsidise Airbus to the tune of some $13B. This was in accordance with trade rules and the US had no objection. In 1992 the US and EU signed a specific treaty on the air industry limiting subsidies to be in the form of loans, at commercial rates, payable over 17 years and of no less than 33% of the total cost. Airbus claims not to be in breach of this agreement and in general the US agrees. Boeing argues that a seperate general agreement in 1994 though restricts any subsidies to non mature industries. Here lies the problem. The EU argues that a super jumbo is a new field and hence a new industry, Boeing argues that it is not.

As for specific subsidies. Guess why the EU has started it's current trade war? Boeing is one of the biggest benefactors of the current illegal loophole in US trade law.

Boeing (with McDonnell Douglas) has also received nearly 20% of ALL grants from the Import-Export bank. By 1998 this bacnk had subsidised $11B of Boeing sales abroard.

There was a very interesting article on this in Time magazine a few years back (Nov 1998, I think).

Paul.

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