Will France and Germany stick together in their response to US trade tariffs?

The EU's exemption from the US tariffs on steel and aluminium expired yesterday, just as everybody expected. There were a lot of angry reactions from political leaders. But the more important issue now is how the EU will respond beyond the small list of measures already pre-announced, and how the US will respond to that reactions. The EU can clearly now not start to negotiate with the US after having said explicitly they would not do so if threatened. And the threat of sanctions on European cars remains real.

The FT reports that these trade tariffs will severely test Franco-German relations. We agree. The German government, especially the grand coalition, will do everything that serves the interests of its domestic car industry. Emmanuel Macron has much less at stake in this conflict. He could use trade as a lever to extract concessions from Germany on eurozone reforms. But if that is not possible - and we don't think it is - there is a reasonable prospect of a disunited EU response to the US. A tariff on cars would test solidarity among EU member states even further. With an 8% current account surplus, and with no policies to reduce it, Germany is not going to attract a lot of solidarity.

The FT also reports that EU government officials are meeting today to work on the technical aspects of the response, with more discussions scheduled to take place in Sofia next week. The US already announced that it would respond in kind to any counter-measures.

FAZ notes that the EU's response will not be enacted immediately. Under WTO rules, it cannot act at least until June 20.

The direct economic impact of the steel and aluminium sanction is small, but the indirect impact is much bigger, as noted by Neil Irvin in the New York Times. He looks at this from the perspective of a US manufacturer. If they want to build a new factory would they do this now if they expect one of the most important input costs to rise as a direct result of the tariffs? Donald Trump's strategy would only work if the US were to gain better trade access abroad, but that is not very likely to happen. The opportunity cost of lost investment will outweigh the direct costs.

Investment is also why we believe that the threat of a 25% tariff on car imports will have a much bigger economic impact than is widely expected.