Tariffs not a solution for trade imbalances between Europe and the U.S.: analyst

Investing.com -- Tariffs are unlikely to resolve trade imbalances between the European Union and the United States, according to analysts at Barclays (LON:BARC), who argue that such measures could instead exacerbate economic uncertainty and disrupt trade flows. 

While the U.S. has proposed reciprocal tariffs in an attempt to address its trade deficit with the euro area, Barclays' research indicates that current tariff differentials are not the primary cause of these imbalances, and therefore, raising tariffs would do little to correct them.

Trade between the U.S. and the EU is characterized by a surplus in goods for Europe and a surplus in services for the U.S. 

In 2023, the euro area recorded a goods trade surplus with the U.S. amounting to 1.2% of EA GDP (€177 billion), while the U.S. maintained a services trade surplus of 0.8% of EA GDP (€122 billion). 

This structure, analysts argue, reflects competitive advantages rather than trade distortions caused by tariffs.

The EU applies a lower average tariff on U.S. imports than the U.S. does on EU goods. Data from Barclays suggests that in 2022, the U.S. charged average most-favored-nation (MFN) tariffs of 2.7% on EU agricultural imports and 1.4% on non-agricultural products. 

By comparison, the EU imposed slightly higher rates of 4.2% and 0.9%, respectively, on U.S. goods. Despite these differences, Barclays concludes that the small variation in tariffs does not significantly impact overall trade balances.

Beyond direct tariff levels, the threat of increased duties introduces significant economic risks. Barclays notes that even the mere discussion of tariffs creates uncertainty, which can lead businesses to delay investment decisions. 

Additionally, tariff hikes can disrupt global supply chains, increasing production costs and causing inefficiencies in industries that rely on cross-border trade. 

The impact of tariffs could be particularly pronounced in manufacturing, where European firms export a substantial volume of goods to the U.S.

The proposal for reciprocal tariffs also raises questions about broader economic repercussions. If the U.S. were to introduce new tariffs aimed at offsetting Europe's value-added tax (VAT) system, European governments could respond by lowering VAT rates on both domestic and imported goods. 

However, as Barclays points out, such a move would be politically and fiscally challenging, given the importance of VAT as a revenue source for European governments.

The risk of a full-scale tariff war remains a key concern for economic stability in both regions. Barclays analysts warn that escalating tariffs could lead to retaliation, further straining transatlantic trade relations. 

Brussels has already signaled that it would implement countermeasures should the U.S. impose unjustified duties, with potential tariffs worth €2.83 billion on U.S. goods set to be reinstated if negotiations fail.

Given these dynamics, Barclays maintains that tariffs are an ineffective tool for addressing trade imbalances between the EU and the U.S.

Rather than focusing on protectionist measures, analysts suggest that fostering open trade policies and strengthening economic cooperation would yield more sustainable benefits for both economies. 

They emphasize that addressing structural trade differences requires long-term strategies, such as enhancing competitiveness through investment in innovation and infrastructure, rather than resorting to short-term tariff measures that risk further economic fragmentation.