Trade defence dominoes

In March 2018, when President Trump slapped a 25 per cent tariff on imported steel, the EU quickly followed suit.  

The EU’s rationale for copying the US, despite criticising Trump’s original action, was to safeguard against the risk that steel originally destined for America would be deflected onto the European market.  

When a large economy stages a significant trade intervention, it has global ramifications. The domino effect in trade is very real.  

Take electric vehicles. Chinese state-backed investment in the sector has transitioned the country from a net importer to a fast-growing net exporter of finished vehicles. On a comparative basis, the EU is among the most open markets for Chinese firms trying to get a footprint abroad. With its 10 per cent tariff, the EU is relatively more attractive to Chinese car exporters than, say, the US (27.5 per cent, and exclusion from Inflation Reduction Act derived consumer subsidies), Turkey (50 per cent), and Indonesia, which directly conditions market access on investment in local production.  

But this will soon change. Last October, the European Commission instigated an anti-subsidy investigation into imported China-originating electric vehicles. The investigation will probably result in new tariffs, provisionally initiated, before the European Parliament election in June this year. (Yes, the timing is deliberate.)   

Where the EU moves, the UK usually follows. While the UK government and industry are currently publicly reluctant to replicate the EU measures, this will probably change once China-originating cars originally destined for the EU turn up in observable quantities on British driveways.  

Already we have seen the British government reluctantly accept it will need to introduce its own version of the EU’s carbon border adjustment mechanism. (Albeit, it has left the design and ultimate responsibility for implementation to a future, probably Labour, government.)  

The logic is the same as the examples outlined above: as the EU’s measure comes into effect – the pricing element comes into force from 2026 – carbon-intensive products such as steel and cement that would otherwise have been sold into the EU could be diverted to the unprotected UK market. The UK could end up bringing forward its 2027 deadline to sync with the EU and avoid 12 months of asymmetrical exposure.  

The growing prevalence of supply chain due diligence requirements and restrictions will have a similar impact. Pressure is growing in the EU to re-start trade defence investigations into imported solar panels. As with electric vehicles, this is primarily a result of Chinese overcapacity, but European industry also claims the US Uyghur Forced Labor Prevention Act (UFLPA) is leading US-destined photovoltaic modules to be diverted into the EU.  

The probability of increased trade intervention can also impact otherwise unrelated industries. The Trump tariffs on steel and aluminium led the EU to retaliate with punitive duties on politically sensitive products such as Harley-Davidson motorcycles and playing cards. China has pre-emptively responded to the EU electric vehicle probe with its own investigation into the alleged dumping of French brandy. Any future UK-initiated investigation or measure would be likely to face similarly-targeted retaliation.   

Trade defence measures and protectionism are not new – but trade and regulatory interventions have certainly increased in recent years: Global Trade Alert has documented 1821 harmful interventions since November 2008. Yet, to return to where we started, if Trump does win the presidency later this year and follows through on his threat to impose a universal 10 per cent import tariff, then the trade defence dominoes will fall faster, and more unpredictably, than ever. Businesses in high-profile sectors, with significant international exposure, would do well to take note.  

This blog was written by Partner and trade expert Sam Lowe. He advises clients on UK and EU trade policy, with a particular focus on regulatory barriers to trade, customs and trade in services.