Boeing ruling creates more trade turbulence

Last week’s ruling from the World Trade Organisation that Airbus benefitted from illegal subsidies is yet another piece of bad news for Europe. Tariffs are coming.

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  1. Garry White

Last week’s ruling from the World Trade Organisation (WTO) that Airbus benefitted from illegal subsidies is yet another piece of bad news for Europe. It will allow the US to legitimately raise tariffs on $7.5bn (£6.1bn) of goods imported from the continent, a move sure to please Donald Trump. However, it could also embolden the president to embrace tariffs as an ongoing state of affairs – and there is a strong chance any tit-for-tat response from Brussels could push the president towards the imposition of auto tariffs. This will damage the Eurozone economy significantly, particularly Germany. However, ultimately, the big loser is likely to be the consumer, with air travel getting more expensive in the next few years if some sort of resolution can’t be found.

The dispute about state aid for Airbus has been rumbling on at the WTO for the last 15 years. However, the trade organisation issued its ruling last week allowing tariffs to be raised. It is sheer co-incidence that the self-proclaimed “Tariff Man” currently occupies the White House. The US will now slap 25% tariffs on EU goods including single-malt Scotch whisky, French wine and Italian cheese. Trade barriers will also be raised on UK-made sweaters, cashmere items and wool clothing, as well as olives from France, Germany and Spain. These could be raised as soon as 18 October.

In parallel

There is a parallel case being assessed at the WTO relating US state aid provided to Boeing. The EU has challenged various US federal, state and local subsidies that benefit the Seattle-based aircraft maker. These amount to $5bn to $6bn in WTO-inconsistent subsidies disbursed between 1989 and 2006. In March 2013, the EU estimated that subsidies granted to Boeing after 2006 amounted to billions of additional dollars. However, a ruling on this case, which is likely to allow the EU to raise tariffs on US goods, is unlikely to be resolved until early next year. However, Brussels has threatened to retaliate similarly against this near-term tariff threat.

Earlier this week, US Secretary of State Mike Pompeo was handed a large wedge of Parmesan cheese by an Italian journalist at a press conference in Rome with Italian Prime Minister Giuseppe Conte. It was a protest at the potential imposition of tariffs on Italian food a few hours before the WTO ruling. Cheese has already been used as a significant trade weapon by Russia and, after five years of a ban, the impact of tariffs on such food can clearly be seen. The biggest loser, as in all tariff situations, is the consumer.

Cheese in Russia

Russia banned imports of some foreign foods five years ago in response to sanctions imposed after Vladimir Putin’s 2014 annexation of Crimea. Since then, there has been a sharp rise in food, with an extra $6.9bn a year now spent on food by Russians, and limited benefit in terms of increased production. Prices for goods affected by the embargo increased far more than the average for consumer goods, according to a study from Moscow’s New Economic School. This has resulted in more cheese production in Russia, benefitting domestic cheesemakers, but the sharp price rises mean Russians are buying less cheese. It’s not quite an “everybody loses” situation, but it is not far off.  There has been a modest gain in domestic production of food, but the boost to GDP this has provided has not made up for the increased prices to ordinary Russians.

Specialty cheese from Europe costs between $10 to $19 a pound at US retailers. If importers passed on the full cost of tariffs, the Cheese Importers Association of America (CIAA) estimates that European cheese prices would increase to $20 to $40 per pound. Consumers would probably balk at such price rises. It also noted that the $1bn of cheese imports being targeted for tariffs generates more than $3.5bn in revenue for other US businesses, including trucking companies, importers, supermarkets, and restaurants. Higher tariffs will eat into margins and would result in the loss of over 20,000 jobs, according to the CIAA.

Airline margins at risk

There is also a 10% tariff being put on Airbus’s planes, which could potentially be a problem for airlines that have ordered aircraft from the European group. Following the tariff announcement, Delta Air Lines warned that the move is damaging for the industry. “Imposing tariffs on aircraft that US companies have already committed to will inflict serious harm on US airlines, the millions of Americans they employ and the traveling public,” Delta said. Tariffs “will also reduce Delta’s profits.”

The fact that orders at Boeing have collapsed following the grounding of its best-selling 737 model following two horrific accidents means airlines already have difficulty getting new planes delivered relatively quickly. A significant increase in costs for an industry that runs on paper-thin margins can only result in rising costs for consumers. And Donald Trump is itching to slap tariffs on other European goods too. “The EU has taken advantage of the US on trade for many years. It will soon stop!” the President said in April. The Trump administration postponed any decision on auto tariffs in May this year, but it was likely merely a stay of execution. It appears the tariff war is now accelerating – and we consumers will ultimately be the main losers.

A version of this story appeared in Friday’s Daily Telegraph

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