The U.S. on Friday implemented punitive tariffs on a record 7.5 billion U.S. dollars' worth of EU products after WTO mediators greenlighted the move on Monday in response to the bloc's illegal subsidies for aircraft manufacturer Airbus.
The tariffs hike, which went into effect at midnight (04:00 UTC), includes duties of 10 percent on Airbus planes for Airbus-producing countries - the UK, France, German and Spain - and 25 percent on agricultural and other products such as French wine, Italian cheese and Scottish whisky.
"Europe is ready to retaliate, in the framework of course of the WTO," French Economy Minister Bruno Le Maire said shortly after meeting with U.S. Treasury Secretary Steven Mnuchin on the sidelines of the IMF annual meetings.
Airbus, meanwhile, hoped that the U.S. and the EU will make an agreement before "creating serious damage" to the aviation industry as well as to bilateral trade relations and the global economy.
In addition to the escalation of the dispute over aircraft subsidies, EU's concerns about U.S. auto tariffs, and disagreement on agricultural market access, are also major obstacles that could hinder the U.S.-EU trade talks in the second half of the year.
Airbus and Boeing standoff
The dispute over aircraft subsidies dates back to 2004 when the U.S. initially accused the EU of illegal subsidies to Airbus' A380 and A350 at the WTO. The EU followed suit and filed a case alleging illegal government aid to Boeing's B787 and 777X jets.
"Both the EU and the U.S. have been found at fault by the WTO dispute settlement system for continuing to provide certain unlawful subsidies to their aircraft manufacturers," an EU statement said following the WTO arbitration decision, adding that "in the parallel Boeing case, the EU will in some months equally be granted rights to impose countermeasures against the U.S. as a result of its continued failure to comply with WTO rules."
The U.S. held a hearing in August about proposed tariffs on a supplemental list of European Union (EU) products including olives, cheese, milk, coffee and whiskey worth four billion U.S. dollars in the nearly 15-year dispute with the bloc over aircraft subsidies. In response to the U.S. tariffs, the EU sought retaliatory tariffs on U.S. exports worth 20 billion U.S. dollars.
The widening of the dispute to other sectors adds to the impasse in trade talks. The additional four billion U.S. dollars list was on top of an original proposal in April to target EU products worth 21 billion U.S. dollars, expanding the scale of EU exports under U.S. sanctions to 25 billion U.S. dollars.
Concerns about auto tariffs
The EU has been concerned about the prospect that Trump will slap tariffs on foreign-made cars and parts. Although Trump announced in May a delay in imposing the tariffs for 180 days to pursue negotiations, he said that "auto tariffs are never off the table."
Should Trump go ahead with auto tariffs, the EU had a list of U.S. products worth 35 billion euros (39 billion U.S. dollars) on which retaliatory tariffs could be levied, said EU Commissioner for Trade Cecilia Malmstrom in July. The list will include U.S. manufacturers like Caterpillar, Samsonite and Xerox.
The bilateral trade relations became strained last year after Trump targeted EU steel and aluminum with tariffs. The EU in the same month imposed tariffs on U.S. products worth 2.8 billion euros as a countermeasure. Trump then threatened to impose auto levies on the EU.
Agriculture not part of trade talks
There has been a huge disagreement on whether to include agriculture in the U.S.-EU trade talks. For the EU, France and other agricultural countries have strongly opposed adding it to the agenda.
However, U.S. Congress members from agricultural states and agricultural groups have required that agriculture be included in the talks, otherwise the trade agreement reached between the two parties will not be approved by Congress.
The disagreement on agricultural market access also caused the failed conclusion of negotiations on the Transatlantic Trade and Investment Partnership (TTIP) between the U.S. and the EU, said Peter Rashish, a senior fellow at Johns Hopkins University.
The two sides have reached no consensus on trade negotiations since they agreed on a trade truce when President of the European Commission (EC) Jean-Claude Juncker went to the U.S. a year ago. The latest round of trade talks in July also ended with no results due to EC election.
The U.S.-EU trade relations may become more controversial in the coming months, and the bilateral trade negotiations will be more difficult than the fierce TTIP negotiations, according to Peter Chase, a senior fellow at the German Marshall Fund.