Perma-bear Albert Edwards: US-China spat may be prelude to full-blown US-EU trade war

Euro coinsPhoto by Leslie Shaffer

A potential trade war between the U.S. and the European Union is a far bigger threat than the risk of a full-scale trade war between the U.S. and China, Societe Generale strategist and perma-bear Albert Edwards said in a note on Thursday.

“Aside from the ongoing and escalating trade friction with China, Donald Trump has focused on the imbalance in bilateral trade with the EU, and Germany in particular – especially luxury autos where German carmakers control more than 90 percent of the U.S. market,” he said, pointing to previous comments from Trump that he wanted to tax Mercedes models off Fifth Avenue.

But Edwards noted that the larger reason the EU may draw Trump’s protectionist ire was due to the eurozone’s current account surplus of around 4 percent of gross domestic product, which was largely due to an undervalued euro as the European Central Bank continues an accomodative policy.

“It doesn’t take a genius to see what’s coming down the line after completion of the current U.S. probe into whether vehicle imports have damaged the U.S. auto industry,” he said, noting Trump already reportedly told French President Macron to expect 25 percent tariffs on imported autos.

Currently, the U.S. charges a 2.5 percent tariff on car imports, well below the EU’s 10 percent and China’s current 25 percent, which is soon expected to be cut to 15 percent, he noted.

“This is the key difference with China (and Japan) in its trade relations with the U.S. Both these countries will ‘play the game’ and make concessions as well as conciliatory noises,” he said. “Germany, in my years of observation, will not. It will push back robustly and the legalistic bent of the European Commission will see tit-for-tat tariffs being implemented far faster than anything seen in the current U.S./China trade spat.”

Edwards noted, however, that while the auto tariff difference between the U.S. and the EU may look like an EU-favoring anomaly, the U.S. charges a 25 percent tariff on light trucks, pick-ups and two-seat SUVs.

But he added, that doesn’t change that the ECB’s divergent monetary policy was keeping the euro undervalued and spurring trade friction. That’s because the ECB was overly accomodative given a “definitional anomaly” in its inflation measure, which once removed suggested the eurozone’s inflation was actually on par with the U.S., he said.

To be sure, Germany’s largest automakers are lobbying for the removal of auto tariffs between the European Union and the U.S., the Wall Street Journal reported on Wednesday, citing people familiar with the situation. The catch to that may be that the German carmakers would also want the light truck tariff removed as well.

The Trump administration’s trade war with China already appears to be hitting Germany’s automakers. Carmaker Daimler warned  on Thursday that the tensions would hurt its sales and it cut its 2018 profit outlook, citing the tariffs on cars exported from the U.S. to China. Those tariffs were in retaliation after the U.S. imposed tariffs on imports from China.

BWM, which also exports vehicles to China from the U.S., said that while it was keeping its profit outlook unchanged for this year, that depended on political conditions remaining stable, Reuters reported.

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