The Trade War Nobody is Talking About, and How to Profit

by chaney3

The ongoing trade war and trade talks between the U.S. and China have been a hot button topic for many of you, as well as the average retail investor, but a series of events have recently sparked heightened tensions between the U.S. and the European Union. So how serious is this? Why would the U.S. involve itself in another trade conflict? Why aren’t the trade disputes getting substantial media coverage? What happened, what will happen, and what should you do? All this and more in this unnecessarily long explanation!

The year is 2004 (yeah, it’s one of those write ups) and the E.U. has just publicly criticized the U.S. for giving over 19 Billion Dollars of unfair subsidies to airplane manufacturer and producer Boeing. (NYSE:BA) The U.S., in typical American fashion, files similar complaints against the E.U. over subsidies given to Airbus as retaliation. Fast forward 15 years and the world trade organization (WTO) has finally reached a verdict on the dispute. Finally, an answer, and what is it you ask? Well it’s this:

The subsidies at issue in this proceeding were actionable subsidies disciplined under Part III of the SCM Agreement. The Arbitrator determined that the level of countermeasures “commensurate with the degree and nature of the adverse effects determined to exist”, in the December 2011-2013 reference period (which was the same reference period used in the compliance proceedings) within the meaning of Article 7.10 of the SCM Agreement, amounts to USD 7,496.623 million per annum. Therefore, the Arbitrator concluded that the United States may request authorization from the DSB to take countermeasures with respect to the European Union and certain member States, as indicated in document WT/DS316/18, at a level not exceeding, in total, USD 7,496.623 million annually.

So WTF does this actually mean? It means, among other things, that the U.S. now has the full legal right to enact penalties against the E.U. over this dispute in the form of tariffs.

Both U.S. and E.U. Trade officials have taken strong positions indicating that this could develop into a more problematic trade disagreement.

“Our readiness to find a fair settlement remains unchanged,” EU Trade Commissioner Cecilia Malmström said in a statement. “But if the US decides to impose … countermeasures, it will be pushing the EU into a situation where we will have no other option than do the same.”

“We expect to enter into negotiations with the European Union aimed at resolving this issue in a way that will benefit American workers.”
“The U.S. has the authority to increase the tariffs at any time, or change the products affected. USTR will continually re-evaluate these tariffs based on our discussions with the EU,” the USTR said.

The tariffs planned currently are aimed to hurt Airbus players mainly with the heaviest tariffs being placed on Aircraft, cheese, wines, meats and other pseudo agricultural products, as well as woolens, tools, liquors and coffees.

This ongoing E.U. trade dispute is considerably less flashy than the ongoing market terrors and doom and gloom articles currently floating around, and much of the dispute is based on political posturing, however they are significant in that both sides of the table seem uncomfortably eager to kick off Trade War 2.0™

While economic troubles continue to rise in Europe, a prolonged trade dispute with the U.S. could severely jeopardize stability. The U.S. has stated that they are looking to have the new list of tariffs come into effect by October 18th pending ratification by the WTO on October 14th. I was already bearish on the economic outlook of Europe as a whole but it seems that the U.S. is content to add grease to the dumpster fire that is the E.U.’s current financial standing. My personal recommendation is to simply buy long dated puts on European market index funds, or alternatively to short the Euro if you’re into that. In either event, expect the broad impact of this ruling to be limited at this time, but watch it carefully if you have any exposure to European markets or holdings of any companies that source material from Europe.

Here’s some links so you can do your own research, as well as sources:
Reuters

CNN Business Article
World Trade Organization Trade Dispute Settlement DS316
European Commission Market Access and Trade Database

 

Disclaimer: Consult your financial professional before making any investment decision.

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