Trump won't play ball on trade, so Europe is going straight to China

  • European and Chinese officials are taking steps to strengthen their trade ties.
  • In the latest trade row between Europe and the US, Trump threatened a new 20 percent duty on cars built in Europe.
  • Though this wouldn't hit a significant part of carmakers' profit margins, it would bring further uncertainty to markets.

With President Donald Trump shaking the world trade order, the European Union is working with China to ensure that multilateral trade doesn’t come to an abrupt end.

European and Chinese officials are taking steps to strengthen their trade ties, but based on a multilateral approach — a system by which international trade has evolved over the past few years.

However, making trade accords with multiple countries is something that Trump opposes on the basis that it has had a negative economic impact on the U.S.

“I feel really we are making progress… both China and the EU believes in multilateralism and a rules-based world order,” Jyrki Katainen, vice-president of the European Commission, told CNBC on Monday.

Both countries launched negotiations for an investment agreement in 2013. According to Katainen, Brussels and Beijing are now taking “the first step forward” in those talks.

“We decided that, in a couple of weeks’ time, the EU and China will exchange market access offers on (the) investment agreement,” Katainen said, adding that this will be presented at a summit in the coming weeks.

Data from the EU shows that China is the bloc's biggest source of imports while also being its second-biggest export market. On average, both countries trade over 1 billion euros ($1.16 billion) a day.

“We concentrated on (a) multilateral trading system for obvious reasons and we agreed to start reforming the WTO (World Trade Organization),” Katainen said.

The European efforts to get closer to China are part of a wider initiative to ensure that international trade isn’t disrupted due to the U.S. administration’s new policy direction. Trump vowed to tackle the U.S. trade deficit when taking office last year. He decided the best way to do that is by imposing new tariffs on imported goods — however, this has upset many countries, including Europe and Canada, traditionally seen as U.S. allies.

In the latest trade row between Europe and the U.S., Trump threatened a new 20 percent duty on cars built in Europe and sold in the U.S.

Katainen didn’t want to detail how the EU would retaliate against those car tariffs, but promised an “adequate” response.

“We don’t want to speculate on this kind of issues, but of course if there is this kind of unilateral, harmful behavior we have to consider seriously and respond adequately as we have done until now. So President Trump wanted to raise tariffs on steel and aluminum and we responded equally,” he said, adding that this is a “bad spiral.”

Trump imposed a 25 percent duty on European steel and 10 percent on European aluminum at the start of June. The EU replied with a 25 percent tariff on a list of American products worth 2.8 billion euros ($3.26 billion).

U.S. tariffs on European cars would ‘fundamentally change’ their business

Arndt Ellinghorst, global head of automotive research at Evercore ISI Group, said that “any significant tariff (on European carmakwers) will fundamentally change those businesses.”

“The majority of them are, of course, German cars. About 600 000 (cars) a year, it’s about 50 percent of what the Germans are selling in the U.S. (and) is coming from European plants,” Ellinghorst told CNBC’s “Squawk Box Europe,” adding that the tariffs will also be a problem for other carmakers, like Sweden’s Volvo.

“Let’s assume we get 20 percent tariff on shipments from Europe to the U.S. that would cost each of the Germans (car brands) about 1.5 billion euros of profit,” he said.

Although this would not hit a significant part of their profit margins, it would bring further uncertainty to financial markets. “I think what the market needs is an end to this huge uncertainty right now and then we can all go back to business,” Ellinghorst said.

The Economist Intelligence Unit (EIU), a think tank, said in its latest Global Country Forecast that it expects the U.S. to follow with tariffs on EU automotive imports, which would “be economically painful for both sides.”

“Nevertheless, the EU's trade surplus with the U.S., worth $115 billion in 2017, is unlikely to decline much in the coming years,” the EIU report said, “meaning that trade will remain a politically sensitive topic likely to come back on the agenda at any time.”