Should Trump consider buying Canada

Relaxation in the US-Europe trade dispute, bigger deal possible

The USA and the European Union (EU) have announced that they will suspend all tariffs for four months in connection with the long-smoldering dispute over unfair government aid for the leading aircraft manufacturers Airbus and Boeing. This is a sign that US President Joe Biden wants to get trade relations back on track. This moratorium was promulgated following a similar agreement between the US and the UK.

The timing of this early breakthrough could improve the chances that the Biden administration will seek a longer-term deal with the EU to resolve pressing trade issues. Among other things, it concerns the taxation of international sales of the extremely highly capitalized US Internet companies as well as the tariffs on steel and aluminum imposed by the previous government under President Donald Trump.

Restoring diplomatic and trade ties with traditional US allies is likely to take much longer than a single presidency.

Settlement of the transatlantic trade dispute

The easing of the tariff dispute, which affects trade flows worth around USD 12 billion, signals that both the US and the EU are negotiating a solution to the conflict in connection with unfair government aid for the two aircraft manufacturers Airbus and Boeing. In addition to easing tariffs for the industries concerned, an agreement would provide airlines with greater clarity about appropriate funding mechanisms for the development of aircraft - an increasingly pressing problem when you consider that China is rapidly expanding its capacities in this area.

In the course of 2021, the USA and Europe will have further opportunities to dissolve the hardened trade policy fronts. This concerns, among other things, the cross-border digital tax suggested by the Organization for Economic Cooperation and Development (OECD) and the rules of the World Trade Organization (WTO) for industrial subsidies. Our baseline scenario assumes that the solution proposed by the OECD will provide for a 2% to 3% tax on digital sales in the country in which these sales were generated. This should be manageable for the extremely capitalized US tech firms, as the higher costs are likely to be passed on to local advertisers and retailers.

The blanket tariffs on steel and aluminum imports to the USA introduced by the Trump administration are likely to be significantly reduced or completely abolished in the second half of 2021 for the traditional allies of the USA, for example the EU, Japan and South Korea.

While the chances are not bad that the US and Europe will resolve these trade disputes by the end of the year, much remains to be done. Investors should be aware of the potential downside risks for US internet giants that could face a patchwork of cross-border digital taxes if the OECD push fails. Manufacturing would also suffer if tariffs persist or rise due to a trade conflict.

Continued tough course vis-à-vis China, but slight tariff relief possible

We would assume that the US will continue to pursue its restrictive policy towards China. The likelihood has increased that the Biden government will join forces with Europe to put pressure on China. The aim is to tackle anti-competitive practices and intellectual property issues, thereby strengthening the United States' position in various industries.

While we would not expect the Biden government to want to forego the comprehensive levies on Chinese products as leverage in negotiations, the US Trade Representative's office could resume talks with Beijing in the second half of the year. Customs easing could therefore be possible. Any tariff waivers would likely affect primarily consumer goods, especially those that benefit from the lower 7.5% duty. However, should tensions flare up again as a result of China's actions in Taiwan or the way it treats the Uighur population in the Xinjiang region, the removal of tariffs could become less likely.

Investors should continue to keep a close eye on how the Biden administration's approach to trade policy develops. This could have significant implications for industrial companies, food and spirits manufacturers and the IT sector.

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