Europe braces for Trump’s tariff carousel

The temporary transatlantic trade truce may come under pressure later this month if the U.S. follows through on a plan to increase its tariff pain on the European Union.

In mid-February, the U.S. could announce levies on a new tranche of European goods — like Champagne and leather handbags — stemming from a decades-old dispute over aircraft subsidies.

Robert Lighthizer, President Donald Trump’s point man in the trade war, is threatening to deploy a particularly nasty trade tactic called “carousel retaliation,” whereby a country periodically shifts tariffs on different groups of goods, which spreads out the sanctions pain across diverse industries, creating uncertainty for businesses and headaches for exporters.

If the U.S. follows through with its plan, it could hammer shares of European luxury brands like Givenchy and Hermes — which produce leather goods — and Remy Cointreau and Pernod Ricard, which make cognac and champagne. LVMH Moet Hennessy Louis Vuitton would be particularly vulnerable because it produces a wide array of these products.

The genesis of the feud goes back 15 years, when the U.S. and EU started fighting concurrent World Trade Organization disputes over allegations of illegal subsidies to their respective aircraft industries. A couple of years ago the Geneva-based trade arbiter said both the U.S. and the EU were guilty.

Last fall, the WTO said the U.S. could legally impose tariffs on $7.5 billion worth of European exports in retaliation for Europe’s aid to Airbus. In October, Washington imposed 10% duties on Airbus aircraft and 25% tariffs on a range of European consumer exports — Scotch, French wine and Spanish olives.

At the time, the U.S. held off on penalizing certain luxury goods like cognac and handbags, with administration officials saying their goal in imposing the duties was to persuade the EU to negotiate a settlement.

But a transatlantic trade peace has proved elusive and U.S. officials say the EU’s overtures have been unacceptable. A WTO ruling expected this summer could provide the EU with the right to retaliate against American goods in response to U.S. subsidies for the Boeing Co.

The EU’s Trade Commissioner, Phil Hogan was in Washington this week, meeting with Lighthizer in an effort to prolong a 2018 trade truce that has been fraying in recent months. But if Hogan fails to persuade his U.S. counterpart to halt the carousel tariffs some of Europe’s top luxury brands could soon find themselves in America’s crosshairs.