Friends who trade together stay together. It is a mantra that increasingly appears to be dictating global trade dynamics to the benefit of Europe’s resurgent economy.
The EU’s trade surplus with the US rose to a record 43.6 billion euros ($47.3 billion) in the first quarter of 2024, official data shows. The 27% year-on-year jump reflects both increased exports to the US and decreased imports to the EU.
Given the overall level of transatlantic trade in long-term upward trajectoryThe widening trade gap in favor of the EU reflects several trends that are unlikely to subside anytime soon.
Closer ties between the US and Europe
First, American businesses and consumers may be buying more from Europe in response to rising trade costs with China after the White House upped the ante in its long trade war with the country.
The Biden administration last week imposed a 100 percent tariff on Chinese-made electric vehicles as part of measures to protect U.S. automakers’ market share, with retaliation widely expected from the Chinese government.
Given the trade war between the US and China, European imports may suddenly seem more attractive, despite generally higher costs. It doesn’t hurt that US consumer demand remains buoyant.
On the other side of the equation, declining EU demand for American goods likely reflects difficult times on the continent.
The German economy, Europe’s traditional powerhouse, has been hit by a manufacturing slump in recent years. Vladimir Putin’s invasion of Ukraine and subsequent sanctions made matters worse, cutting Germany off from the cheap Russian oil and gas it depended on to fuel its industry.
More broadly in Europe, rising inflation and rising interest have hit consumer confidence, which remains at levels last seen during the Great Recession of 2008/09.
So the growing surplus “is explained by the strength of domestic demand in the US and weakness in demand in the EU,” said Andrew Kenningham of Capital Economics. summed up FT.
However, it will be interesting to see whether the changing fortunes of the two economies will impact trade flows for the rest of the year.
While the eurozone saw higher inflation at the peak of the cost of living crisis, it was able to tame prices faster than its US peers, with the European Central Bank expected to cut rates in June.
Leading banks including Morgan Stanley and UBS now expect the US economy to slow while the average European begins to benefit from falling prices and interest rates.
Europe will also hope to correct the growing trend of European capital flowing to the States. Major German companies including Volkswagen and Mercedes-Benz made a record $15.7 billion in capital commitments in the U.S. last year, nearly tripling the 2022 figure.
EU vs China
While the EU currently benefits from America’s shift away from Chinese goods, it also has problems in its economic relations with China.
The EU’s trade deficit with Asia’s largest economy fell to a three-year low of 62.5 billion euros ($67.8 billion) in the first quarter of the year.
The bloc risks sparking its own trade war with China over alleged government subsidies on production following a flood of cheap goods into the European market.
In September, European Commission President Ursula von der Leyen accused China of distorting the European car market by subsidizing automakers including BYD and Geely.
European Commission investigators visited automakers’ factories as part of an investigation into anti-competitive practices.
The EU is expected to follow the US lead in imposing tariffs on Chinese electric vehicles, although they are not expected to be anywhere near the level set by the Biden administration due to closer trade ties with the region.
Indeed, speaking in Brussels on Tuesday, von der Leyen said The EU did not want to ignite a trade war with China by opting for more diplomatic language.
“I don’t think we are in a trade war… We are reducing the risks associated with China, we are decoupling from Russia,” von der Leyen said.
“We know the world is changing, we know the competition is getting tough. But the single market has been our safe haven, so let’s strengthen it,” she said.
However, it seems that the trend of “friendship” between the US and Europe will only increase, perhaps to the benefit of the EU.