In October, the US government imposed new tariffs on a range of products imported from Europe. The 10% tariffs were in response to what the US says are illegal subsidies paid to European aircraft manufacturers. These are not the first tariffs imposed on European goods by the Trump administration-in 2018, tariffs were imposed on steel and aluminium imports from around the world

What is the EU US trade war all about?

The tariffs will be levied on about $7.5 billion a year in goods and are sanctioned by the World Trade Organisation (WTO). The move follows nearly 20 years of litigation following complaints by Boeing about the subsidies Airbus receives.

The US is targeting products exported by the four countries that give Airbus subsidies-namely Spain, the UK, Germany, and France. Products include cheese, wine, whisky, clothing, tools, and olives. However, the tariffs also hit other countries that export the same products-in particular, cheese exports from Italy.

This may trigger a tit-for-tat trade war. The EU has already threatened to impose similar tariffs on imports from US-based Boeing, which also receives subsidies from the US government.

Some economists believe an escalating trade war between the US and EU would trigger a global recession. The impact of the ongoing trade war between the US and China is being felt far and wide, and the new trade war will only increase economic uncertainty around the world.

Will this trade war escalate?

The trade war has already escalated to an extent. The US has now proposed additional tariffs on French goods in response to a new digital tax imposed by France on companies like Google, Amazon, and Apple. The digital tax has been in the works for a long time with most European countries complaining about the low tax rates paid by large tech companies. France's digital tax is not aimed specifically at US companies, though US companies will pay the most.

Italy, Turkey, and the UK are also proposing similar digital taxes. While these taxes are not necessarily unfair, US tech companies do have considerable lobbying power in Washington. That means there is every chance the US government will be persuaded to retaliate.

One US official said the US could slap import duties as high as 100% on imports from France.

Cheesemakers in Italy have responded to the tariffs by requesting subsidies from the EU. Italy is not supposed to be a target of the trade war, but Italy's cheese industry has become collateral damage. The irony is that the US tariffs that are a response to EU subsidies may lead to further subsidies in Europe.

Some European officials have also suggested a carbon tax on imports from countries that don't do their bit to reduce carbon emissions. That may be a completely different issue, but it would still fuel the escalation of a trade war.

What are the potential market implications?

The US dollar has actually weakened against most currencies since early October when the tariffs were announced. After hitting a two year high of 99.67 at the end of September, the Dollar Index has traded as low as 96.53. This is not necessarily related to the tariffs which as they stand are not large enough to have a direct effect on either the Euro or the US dollar.

If the trade war does escalate, the effect is more likely to be increased uncertainty and volatility along with deteriorating market sentiment. This will impact equity markets and other "risk-on" assets like emerging market currencies. In particular, the currencies of commodity-producing countries like Australia, South Africa, and Brazil would be vulnerable.

Global market volatility typically benefits the USD and Gold in the short term. Gold is probably the asset to watch, as it looks like it may be poised to resume the rally that started in September 2018.

The USD may initially react positively to a sell-off in risky assets, but its longer-term direction would be affected by other factors. The GBP may also benefit if certainty over Brexit increases, while uncertainty creeps into other markets.

The bigger picture

There are two other factors that may affect the way a trade war will play out: Donald Trump's impeachment trial and the 2020 US elections will affect the way the US responds in the next year.

If Trump survives the impeachment trial, he will be emboldened to continue with his policy agenda. His focus will be on building support ahead of next year's election. He will want to show strength, but also prevent the US economy or stock market crashing before November.

How emboldened he becomes will also depend on how much support he gets from Republican senators.

In the seemingly unlikely event that Democrats do manage to remove Trump from office, short-term uncertainty will rise. The Democrats would want to end the trade wars, but that would take time-and they would have to take the White House first. In the interim, the US political landscape would be even less predictable than it has in the past, and this would drive market volatility.

Either way, 2020 is shaping up to be an interesting year for the global economy and markets.

Begin trading today! Create an account by completing our form

Privacy Notice

At One Financial Markets we are committed to safeguarding your privacy.

Please see our Privacy Policy for details about what information is collected from you and why it is collected. We do not sell your information or use it other than as described in the Policy.

Please note that it is in our legitimate business interest to send you certain marketing emails from time to time. However, if you would prefer not to receive these you can opt-out by ticking the box below.

Alternatively, you can use the unsubscribe link at the bottom of the Demo account confirmation email or any subsequent emails we send.

By completing the form and downloading the platform you agree with the use of your personal information as detailed in the Policy.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68.5% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Back to top

Office network

One Financial Markets is the trading name of Axi Financial Services (UK) Ltd, a company registered in England with company number 6050593. Axi Financial Services (UK) Ltd is authorised and regulated by the Financial Conduct Authority in the UK (under firm reference number 466201) and the Financial Sector Conduct Authority in South Africa (with FSP number 45784).

The information on this site is not directed at residents of the United States, Belgium, Poland or any particular country outside the UK and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. is owned and operated by Axi Financial Services (UK) Ltd.

Award winning broker
We have been presented with a number of awards that recognise the quality of our service and dedication to our clients :

Best FSA Regulated Broker
Saudi Money Expo

Best Education Product
Saudi Money Expo

Best Broker - Online Trading
IAIR Awards

Best Institutional Broker
Saudi Money Expo

Best FX Services Broker
CN Forex

Top International
FX Broker 2015

Saudi Money Expo

Broker of the Year
Online Trading – Middle East

IAIR Awards

Best Forex
Customer Service 2018

JFEX Awards

We accept the following payment methods: