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EU's Trade Surplus With U.S., a Bone of Contention for Trump, Hits Record -- Update

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02/15/2019 | 12:37pm EDT

By Emre Peker in Brussels and Paul Hannon in London

The European Union reported a record trade surplus with the U.S. last year, a development that could weigh on slow-moving U.S.-EU trade talks and comes as the Trump administration prepares to deliberate hefty tariffs on European car imports.

Meanwhile, slowing exports from Europe to other trading partners, most notably China, in 2018 suggest the flagging EU economy could cool further this year. Failure of the U.S.-EU trade talks and fresh duties from the U.S. could compound Europe's economic pain in 2019.

Following a July agreement to talk rather than impose new levies, Brussels and Washington have held four rounds of negotiations in an effort to ease tensions and further liberalize trans-Atlantic trade. The next round of talks is expected to take place in Washington early next month.

However, progress on a top agenda item -- a deal on industrial trade that would slash duties and non-tariff barriers -- has been elusive. The EU and U.S. are already bickering over whether to include agriculture in negotiations that have yet to start. Regulatory cooperation to improve trade in services, pharmaceuticals, chemicals and medical devices also hasn't yet materialized.

A more pressing issue for the EU is a report due Sunday from the U.S. Commerce Department on whether imports of vehicles and auto parts pose a national security threat. If the report finds that they do, that would trigger a 90-day deadline for President Trump to decide on whether to impose additional levies on cars from allies including Europe and Japan.

"It seems likely that the U.S. will soon increase the pressure on the EU with a threat of 25% car import tariffs to come," said Holger Schmieding, an economist at Berenberg Bank. "For Trump, that would probably be part of his usual hardball negotiating tactics."

The Trump administration has complained about the EU's 10% tariff on imported cars, but the U.S. Congress is more worried about eliminating barriers to agricultural trade that sharply limit shipments of American beef, pork and other products.

The new chairman of the U.S. Senate committee that oversees trade, Sen. Chuck Grassley (R., Iowa), said this year that agriculture should be included in the talks, since gains for farmers often help bring momentum to trade measures on Capitol Hill. The EU has repeatedly said the joint statement from July doesn't include agriculture, refusing to include it in negotiations.

EU Ambassador David O'Sullivan said Thursday that talks are advancing between the two economies, with technical talks ongoing on Friday. Movement within the Trump administration on U.S. auto tariffs is "not going to distract us from taking forward the discussions" on lower tariffs, Mr. O'Sullivan said.

Still, many former U.S. officials and trade experts in Washington worry the U.S. and EU will struggle to agree on the scope of the talks, an issue that plagued earlier broad negotiations between Brussels and the Obama administration.

How to approach talks with the U.S. will top the agenda of EU trade ministers meeting next week. With the looming threat of car tariffs, European officials are once again facing the dilemma they confronted when Mr. Trump unveiled steel and aluminum tariffs last year: appease or confront the White House? The EU is torn.

The European Commission, the bloc's executive arm, proposed mandates to negotiate agreements on industrial goods and conformity assessments that would slash tariffs and cut red tape. Commission officials hope for swift approval from EU governments to launch talks with U.S. counterparts.

The European Parliament's International Trade Committee will vote Tuesday on a nonbinding resolution advising against trade talks with the U.S.

"Negotiations of a trade agreement with the U.S....will not be successful in producing an outcome that would be in the interest of European citizens," the draft resolution says, citing ongoing steel and aluminum tariffs, the threat of auto tariffs, and other trans-Atlantic disagreements.

EU governments will seek a compromise to push ahead.

A Germany-led faction wants to move quickly and show results to Mr. Trump by tasking the Commission with negotiating trade deals. An opposing camp spearheaded by France cautions against rushing under pressure from Washington.

"Some member states are pushing to go really fast and deliver our side of the July statement," an EU official said. "Others think maybe that's not the best strategy. Past events show even when we showed willingness, we were slapped with tariffs."

The EU has been preparing for potential auto levies that would hit EUR50 billion ($56.4 billion) in annual European exports to the U.S. Brussels has prepared a draft list of U.S. exports worth EUR20 billion that would be targeted with counter-duties if Mr. Trump imposes car tariffs.

"The EU will react in a swift and proportionate way," Commission trade spokesman Daniel Rosario said Thursday. "But let's not turn the tables here, let's see what happens and let's take it from there."

The EU's rising trade surplus over 2018 will likely underline U.S. concerns about the terms under which trans-Atlantic trade takes place, although the EU cautioned against focusing too much on the size of the gap.

"International trade relations are about much more than trade surplus or trade deficit," Commission spokesman Alexander Winterstein said Friday. "This is a much more comprehensive relationship."

Figures released Friday by the EU's statistics agency showed the bloc's exports of goods to the U.S. rose by 8% from 2017, while its imports from the U.S. rose by just 3.9%. That left the EU with a trade surplus of EUR139.7 billion, up from EUR119.6 billion in 2017.

The pickup in exports to the U.S. reflects strong economic growth in that country as taxes were cut and government spending rose. By contrast, weaker growth in the EU held back demand for imports from the U.S.

--William Mauldin in Washington contributed to this article.

Write to Emre Peker at emre.peker@wsj.com and Paul Hannon at paul.hannon@wsj.com

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