The U.S. and China are Having a Trade Fight and Europe is Feeling the Burn

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Retrieved from https://www.wsls.com/money/europe-says-trade-fight-with-us-will-hurt-economic-growth

Trade Tensions

Although the Trump Administration appeared to be going on the trade offensive against the whole world with its wide spread steel and aluminum tariffs earlier in the year, most of the trade tension since has been focused on China. Over the course of 2018, the U.S. has implemented tariffs on $250 billion in goods from China outside of steel and aluminum.

With widespread claims of Chinese joint ventures forcing technology to be transferred to them from their foreign partners, a need for action is widely desired around the world. These wide spread tariffs, though, are not exactly what people had in mind for a way forward.

With the trade standoff being between the U.S. and China, one would expect that these two countries face a majority of the downfalls from tariffs (higher trade costs, prices going up, etc). China has already been facing their slowest growth in a decade, and the trade spat has helped toss fuel in the fire. Trade has also contributed to a sharp downward trend in their stock market.

The U.S., though, has not seen a widespread economic impact, at least so far. The stock market has been hit fairly hard over the past month partially from investors’ anxiety over tariffs. However, unemployment is still at a multi-decade low and consumer spending has been running strong over the past few months, helping to maintain our economic growth.

So is this the full extent of the impact from the trade standoff, or do people need to also look elsewhere? A look across the pond to Europe would tell you that the impacts do not follow a two-way street.

Europe and Trade

With the complex interdependence of modern supply chains, the impact of a two-country standoff is felt well outside of their borders. Europe is no exception.

With relatively weak economic growth persisting across the EU since the Great Recession, Europeans do not have as much disposable income as the used to. This has led to many major EU economies being more dependent on exports than they used to be. If people at home won’t spend any higher, companies have to look elsewhere to make sales happen.

Three of the largest economies in Europe have all seen exports become a larger share of GDP since 2006 according to World Bank data. Germany has increased from 41% to 47%, France 28% to 31%, and Italy 26% to 31%.

Out of these major economies, Germany has felt the worst impact of the trade fight since their dependency on exports is so high.

German Cars

One example of the impact is the auto industry. German giants BMW and Daimler both produce a significant amount of cars in the U.S., including the BMW’s full line of SUV’s and Mercedes’ GLE, GLS, and C-class. Many of these cars then get exported from the U.S. to China. When China ratcheted up tariffs on auto imports to 40% for American made cars, the BMW’s and Mercedes made here were affected on top of American producers’ cars.

Daimler and BMW both lowered profit outlook earlier in the year partially due to these tariffs.

(Note: China announced this afternoon that the auto tariffs would be reduced from 40% to 15%. Germany has regardless seen a negative economic impact prior to today.)

Anxiety from Huawei

European economies were also impacted with a non-tariff consequence of the trade fight this past week with the arrest of Huawei’s CFO in Canada. This arrest comes amid the U.S.’s global effort to pit major economies against Huawei, who the U.S. government sees as a security threat.

Huawei is the world’s largest producer of telecommunications equipment and also the second largest producer of cell phones, even without selling within the U.S. In Europe, they control roughly 25% of the cell phone market and have seen surging sales over the course of 2018.

With such market dominance, a threat to their day-to-day operations from the arrest shook European investors. This could be seen through the Stoxx 600 hitting a multi-year low following the announcement.

A Global Economy

European connections to U.S.-China trade have resulted in various negative impacts for large European economies like Germany. The German DAX index has entered a bear market this past weak and their overall GDP contracted 0.3% in the third quarter largely due to drops in exports.

The U.S.-China trade spat is far from a two country standoff. European connections show the importance of the intertwined global economy and how American policies impact more than just the U.S. and China. German companies will tell you from first hand experience that there is plenty of collateral damage in this two-country trade fight.

 

 

 

 

 

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