unfree trade

Trump may have a point about EU tariffs, ifo says

New VW cars are covered with protective covers before loaded for export on a transport ship at the harbour in Emden
USA here we come. Source: Reuters

US President Donald Trump may actually have a point when it comes to unfair taxes on US goods coming into Europe. That is the finding of a new study by a leading German think tank. Where they differ is how to deal with it: The group urges new talks to lower tariffs across the board, instead of engaging in a tit-for-tat escalation in new taxes.

“The EU is by no means the paradise for free traders that it likes to think,” said Gabriel Felbermayr, director of the ifo Center for International Economics, a division of the Munich-based ifo Institute. The European Union actually comes off as the bigger offender when compared to the US, he added. The unweighted average EU customs duty is 5.2 percent, versus the US rate of 3.5 percent, according to ifo’s database.

So when Mr. Trump complains of “massive tariffs” he is not that far off the mark in several cases. And he does complain. “If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a tax on their cars, which freely pour into the US,” the president tweeted earlier this month. “They make it impossible for our cars (and more) to sell there. Big trade imbalance!”

“The EU is by no means the paradise for free traders that it likes to think.”

Gabriel Felbermayr, director of the Ifo Center for International Economics

Cars are a particular sore point. Imports into the US are not quite free, but pay a tariff of only 2.5 percent, compared with the EU tariff of 10 percent on US car imports. Some other examples from the EU include a 17 percent tax on apples and 20 percent on grapes.

Overall, tariffs totaling $5.7 billion were levied on US exports to the EU in 2015. The far greater volume of EU exports into the US were subject to customs duties of just $7.1 billion. This does not even take into account the inhibitory effect of the higher EU tariffs on the volume of US exports.

The US is not blame-free. The lower average level of tariffs masks higher duties that hit particular European products, from 9 percent on chocolate to 20 percent on key milk products, and 25 percent on small trucks.

The disparity dates back a quarter-century to the Uruguay Round of trade talks under the aegis of the General Agreement on Tariffs and Trade (GATT), ifo said in a new study. A lot has changed in the meantime. The EU has grown from 12 members to 28. GATT became the World Trade Organization and enrolled more than 40 new members, including China and Russia. The Doha round of trade talks started in 2001 to take account of these changes, but the talks collapsed as developing economies resisted lowering their own tariffs.

Instead, the WTO sought a different approach for “new world” trade in view of the explosive growth in developing economies, particularly China. Talks for multilateral accords in the Pacific and Europe were based on harmonizing regulations, protecting investors, securing intellectual property and similar issues, rather than on the “old world” focus on tariffs.

“The paradox of the ‘new’ American trade policy is that it wants to act with the instruments of the ‘old world’ in the ‘new world,’” Mr. Felbermayr writes in the new ifo study. But the EU is not without blame here either: In fact it wasn’t even Mr. Trump who first broke off negotiations over a US-EU free trade deal known as the Transatlantic Trade and Investment Partnership (TTIP), the German economist noted. It was actually the EU that put the unpopular talks “on ice” ahead of elections in France and Germany.

Darrell Delamaide is a writer and editor for Handelsblatt Global in Washington, DC. To contact the author: d.delamaide@extern.handelsblatt.com.

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