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US allies brace for trade war as tariff negotiations stall

BERLIN — A few weeks ago, it felt as if a trade war pitting the United States against allies like Australia, Canada, and the European Union was over before it even began. The Trump administration dispensed so many temporary exemptions to steel and aluminum tariffs that many countries figured the threats were just political theater.

But with only days left before the exemptions expire and punitive tariffs take effect, it’s dawning on foreign leaders that decades of warm relations with the United States carry little weight with a president dismissive of diplomatic norms and hostile toward the ground rules of international trade.

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What began as a way to protect American steel and aluminum jobs has since become a cudgel that the Trump administration is using to extract concessions in other areas, including car exports to Europe or negotiations to revise the North American Free Trade Agreement with Mexico and Canada.

As a May 1 deadline looms, the decision on whether to grant permanent exemptions to the steel and aluminum tariffs, and to whom, appears likely to come down to the whims of President Trump, who has been influenced by brief interactions with foreign leaders and has seesawed between scrapping and rejoining global trade deals.

The European Union, the United States’s biggest trading partner, indicated over the weekend that it was losing hope of reaching an agreement in the face of what many of the region’s political leaders regard as unreasonable demands. While a last-minute extension of the deadline is possible, Angela Merkel, the German chancellor, who met last week with Trump in Washington, said Sunday that Europe was ready to retaliate if Trump did not grant an exemption.

The German government said in a statement that Merkel, President Emmanuel Macron of France, and Prime Minister Theresa May of Britain agreed after speaking on the phone that if the tariffs go into force, “The European Union should be ready to decisively defend its interests within the framework of multilateral trade rules.”

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The uncertainty is sowing chaos in international supply networks. Car companies and other manufacturers do not know whether ships carrying steel may suddenly be barred from US ports.

Some countries are confident they will avoid the tariffs. Australia is treating an exemption as if it’s a done deal. Brazil, which primarily exports slab steel to US manufacturers, is hoping to escape by agreeing on limited quotas for more sophisticated products. Argentina is counting on the good relationship between its president, Mauricio Macri, and Trump.

“In the conversations that we have on the issue, the positive relationships between our governments — and our presidents— certainly comes up,” Miguel Braun, Argentina’s trade secretary, said in an interview.

But it’s unclear whether the confidence is justified. The White House has not confirmed that Australia, Brazil, or Argentina will receive exemptions.

In terms of the potential disruption to the global economy, the dispute with Europe may be the most critical. The United States and European Union account for about one-third of world trade.

Only a few years ago the United States and Europe were discussing the possibility of eliminating almost all trans-Atlantic trade barriers. Now they are stymied by fundamentally different worldviews. As the Europeans see it, Trump is demanding concessions that would make them accomplices in dismantling a postwar trade framework they hold sacred.

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The Europeans want to play by the rules of the World Trade Organization; the Americans are making demands that would force the Europeans to break them.

“If we stick to the rules,” said Thiess Petersen, an analyst at the Bertelsmann Foundation in Germany, “there is no chance for concessions.”

German cars, are one of the major sticking points.

Commerce Secretary Wilbur Ross, who has been handling talks with the European Union, has been pushing the 28-nation bloc to reduce its tariffs on imported American cars as one way of cutting its trade surplus with the United States. In a recent interview with CNBC, Larry Kudlow, the chief economic adviser, said the United States wanted more concessions before it granted a permanent exclusion.

But if the European Union accepted the demand for lower car tariffs, international treaties would require it to apply similar terms to automobiles from all other WTO members.

The biggest beneficiary might be China. A member of the WTO, China is keen to become an auto exporter and would be thrilled to get easier access to Europe without giving up anything in return.

Together, the countries seeking to extend temporary exemptions account for about half of American steel imports. The United States has already granted South Korea a permanent exemption as part of negotiations over a revised trade deal.

Other countries have already been denied exemptions and started paying tariffs of 25 percent on steel and 10 percent on aluminum. They include China and Russia as well as Japan, a close ally.

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American negotiators appear to be trying to persuade countries to restrain their own metal shipments voluntarily — without retaliating against the United States or suing the country in international courts. But few countries appear eager to play along.

For Canada and Mexico, among the largest exporters of steel and aluminum to the United States, the Trump administration has tied their exemptions to NAFTA talks. Negotiators from the three countries are scheduled to meet again on May 7 as they push to work through the major remaining disagreements and announce a revised pact.

Canadian and Mexican negotiators played down the risk of the tariffs on Friday, suggesting that applying trade penalties in the meantime could sink the talks. Chrystia Freeland, the Canadian foreign minister, said that the steel and aluminum tariffs were a “completely separate issue” from the trade deal and that there was “no justification whatsoever” for trade barriers against Canada.