Summer Gin And Tonics At Risk As Tariff Man Makes A Stealth Comeback

“Tariffs on British gin could increase US prices at peak season for gin and tonics”, Bloomberg writes, of proposed new levies on $3.1 billion in goods from the EU and the UK.

Now that’s a potential tragedy.

The new tariffs were discussed in a USTR notice (embedded below), which proposes modifications to the list of products currently subject to additional duties in connection with the long-running civilian aircraft dispute between the US and Europe.

In October, Trump claimed victory when the WTO green-lighted retaliatory measures against $7.5 billion in EU goods per year to compensate for what the body decided were illegal subsidies for Airbus. It was the largest arbitration award in WTO history and came despite Trump’s repeated claims that the organization is “always f–ing” America.

The USTR promptly announced its intention to tax everything from French wine to cheese to whisky to olives, pork, butter and yogurt. Europe made it clear that they would likely retaliate in 2020 once a parallel dispute involving Boeing is adjudicated.

The Boeing decision (on illegal subsidies to the company by the US) is expected next month, and the EU wants the WTO’s blessing to hit more than $11 billion worth of US exports to Europe with levies in retaliation.

Bob Lighthizer is apparently keen on sending a message ahead of time by threatening ongoing “carousel” tariffs, an especially pernicious strategy that involves changing what categories of products are subject to duties.

As Bloomberg notes, the new USTR notice “is a reminder that the US’s tariff targets may shift or be subject to higher levies — a strategy that spreads the sanctions pain across an array of industries, creating uncertainty for businesses and headaches for exporters and importers alike”.

If that sounds like an extremely petty way to go about things, that’s because it is. It piles uncertainty atop punitive action, to create a nauseating cocktail of economic indeterminacy. Here is the key paragraph from the notice:

In addition, the U.S. Trade Representative is considering an additional list of products of France, Germany, Spain, and the United Kingdom that may be included on a final list of products subject to additional ad valorem duties of up to 100 percent. The additional list of products (included in Annex III to this notice) contains 30 tariff subheadings with an approximate value of $3.1 billion in terms of the estimated import trade value for calendar year 2018. If the U.S. Trade Representative determines to modify the action being taken in the investigation, the final list of products subject to additional duties in the action may be drawn from the list of products in Annexes I, II, or III.

Annex III lists a hodgepodge of products for potential levies including all manner of olives, potatoes, pastries, cakes, biscuits, chocolate, coffee (including decaf), beer, vodka, interchangeable tools, trucks, water heaters and, as alluded to here at the outset, gin.

Last month, Lighthizer attempted to argue that the removal of a Washington State tax break preemptively shields the US from the forthcoming WTO decision on Boeing.

“With Washington State’s repeal of this relatively minor tax reduction, the United States has fully implemented the WTO’s recommendation, ending this dispute,” he said, on May 6. “This step ensures that there is no valid basis for the EU to retaliate against any U.S. goods. For more than 15 years, the United States has called on European governments to end their illegal aircraft subsidies. We will continue to press the EU to negotiate a resolution that respects the WTO’s findings”.

Trade talks between the US and EU have gone nowhere for at least a year.

In January, EU trade commissioner Phil Hogan called Trump’s focus on America’s trade deficit “an obsession” and scolded the White House for the president’s “America first” mantra, which Hogan charged with creating “a high-pressure crisis moment for the international trading system”.

During his combative press conference in Davos, Trump accused the EU of “having tariffs all over the place” and making it “impossible to trade”. “They are frankly more difficult to do business with than China”, the president said of America’s European allies.

At the time, Wilbur Ross insisted the US hasn’t abandoned the idea of auto tariffs, despite most observers having stopped taking the threat seriously months ago.

Trump has also been at odds with France over the country’s digital tax, and during a press event in Maine this month, again threatened tariffs on EU cars in retaliation for duties on lobster.

“The US has stepped back from the settlement talks in recent weeks”, Hogan told European trade ministers earlier this month. “If this remains the case, the EU will have little choice but to exercise its retaliation rights and impose our own sanctions”.

It’s not clear how serious market participants should take the new threat from Lighthizer (in terms of whether levies on an additional $3.1 billion in goods is actually something that should prompt a durable risk-off move), but it does suggest the administration won’t be taking any prisoners if the EU moves ahead with retaliatory measures following the WTO’s adjudication of the Boeing dispute.

As ever, it’s not one round of tariffs or even the enhancement of existing measures that’s the issue. Rather, it’s the prospect of tit-for-tat retaliation, the breakdown of diplomacy and spiraling protectionism that poses a threat. Especially in the post-COVID world, which is generally expected to be characterized by further de-globalization.