Tariffs

New Trade War: Who Has More Leverage?

After reciprocal tariffs exceeding 10 percent on imports from countries all over the world went into effect Wednesday, the U.S. is bracing for retaliation. China was quick to slap an additional 84 percent on U.S. imports, while the EU approved a much smaller tariff package affecting $23 billion of U.S. goods. Additional U.S. tariffs on Chinese goods now stand at 104 percent, while the EU received a reciprocal tariff of an additional 20 percent.

Looking at trade figures, who has more leverage in this new trade war? The U.S. is a big buyer of foreign goods, which is something that President Donald Trump is looking to change, but in reality, substitution will be hard. This is why its own tariffs could become costly for the country as well as for those selling goods to the United States. Meanwhile, China and the EU buy much less from the U.S. in absolute terms, making retaliation less painful for both parties but also less effective a way for the EU to pressure the U.S. to reverse course.

Relatively speaking, however, the U.S. is about as important as customer for China as China is a supplier to the U.S. The same is true on the side of the smaller trade flows from the U.S. to China. Buying 15 percent of its exports, the United States is China's biggest international customer by far, giving the U.S. leverage here. However, China's more centrally organized economy has been rated as better equipped to handle trade war blows.

EU trade with the U.S. could be seen as more lopsided, as U.S. imports from the trade bloc as well as U.S. exports to it make up around 18 percent each of total U.S. imports and exports, respectively. Looking at the EU side of things, trade from and to the U.S. only makes up 6 percent and 8 percent of EU imports and exports, at least when also taking into account intra-EU trade, making the U.S. less of an important partner overall. On the other hand, one fifth of extra-EU exports did go to the U.S. last year.

While China's economy is smaller in nominal terms than that of the U.S., the EU is on more of an equal footing in term of economy size. The option to retaliate against U.S. services - a stronger suit in American exports - is also on the table. Ultimately, both sides have plenty to lose in a trade war that is as universally harmful as it is unpredictable.

This is specifically true for U.S. trade partners Canada and Mexico, whose export trade largely depends on the U.S., and who are also substantial buyers of American goods. The two countries that are significantly more dependent on the U.S. than vice versa are expecting new additional 12 percent tariffs on non free-trade goods after previous 10-25 percent tariffs on most U.S. imports were paused.

Description

This chart shows the value of U.S. imports/exports with major partners (in billion U.S. dollars) and significance to partners' trade.

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