Facing increasing political tension from its western ally, the European Union is now at the crossroads, deciding on the next steps to make. Although belonging to the top developed parts of the world, the EU representatives, facing the pressure of the incumbent U.S. President Donald Trump, are forced to realize the fact that Europe has already lost its geopolitical position. The re-opened sanctions against Iran and the U.S. import tariffs, used as a tool of pressure, are pushing the EU representatives to the corner.

Despite slight optimism coming from the latest solution found in Italy and Spain, EUR/USD is still paying close attention to the relationship of both blocks, where the EUR remains on the weaker side over the last month and further pressure from the U.S. side could limit its corrective gains.

Facing the threat of the EU-U.S. trade war, the EU Trade Commissioner Cecilia Malmstrom informed Reuters on Monday that the European Union could impose preliminary measures for the purpose of supporting the steel and aluminum industries in the EU as early as July.

According to the rules of the World Trade Organisation (WTO), or more specifically the article XIX of GATT, 1994, the EU could apply the above-mentioned “provisional safeguard” for maximum 200 days provided that the findings prove that higher imports have the potential to result in adverse impacts for the EU steel and aluminum industries.

On the other hand, the EU remains worried about its own sectors, in particular from Asian competitors, as well. The European Commission has already initiated a study related to this issue, investigating if the Asian producers could have a significant impact on European steel sector.

This issue has started in March 23, when the U.S. import tariffs of 25% on steel and 10% on aluminum came into effect, applied on the EU since Friday (June 1). The EU is retaliating as well, using the WTO rules, imposing its own tariffs for number of U.S. products.

Malmstrom calls the Trump’s decision as a “dangerous road,” spurring trade war between both blocks, warning that it’s not easy to win such war.

After the first round of tariffs, further measures are expected in relation to the European car exports to the U.S., where in particular Germany is going to be impacted markedly. For this case, the EU representatives have already declared that they are not willing to accept the U.S. approach and further retaliation will be even worse.

Adding fuel to the fire, Trump has also initiated procedural issues in the WTO, blocking the appointment of appeals judges bringing questions about the functionality of the WTO system.

The U.S. pressure coming in a form of protectionist measures at the time of dispute around Iran’s sanctions is providing a deeper insight into the geopolitical game of the incumbent U.S. government, executing a strong comeback to the global markets, in particular seen in the oil markets.

As the EU remains one of the parties of the nuclear deal, not willing to leave the agreement, Trump’s administration is increasing the pressure on the bloc as well as on China and Russia after its withdrawal from this deal. As the U.S. is one of the oil producers, even expected to become the global top 1 oil producer, there are no changes expected on the U.S. side, while the other producers seem to accept this fact even weighing the increase in production (mainly OPEC countries, but Russia as well).

The question will be now, how the EU is going to be persistent in its approach while its “unity” will be tested in relation to foreign affairs. As the Trump is know to prefer individual talks, the EU representatives seem to understand the necessity to keep unified stance.

However, there is the risk that under the U.S. pressure, the EU will follow the U.S. requirements. Therefore, even the reactions of Iran point to the fact that the Middle East country does not trust the EU to keep its word and expects the European bloc to follow the North American country.

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About Author

Marek Bocanek

After finishing law and economic studies, Marek launched his career in Brno, Czech Republic in the financial sector, specializing in capital markets and related legal issues. After 6 years of experience in the industry he moved back to Bratislava, Slovakia, where he worked as an analyst in the forex market for another 3 years. Simultaneously he was a trader focused on the major forex pairs and oil futures.

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