US President Donald Trump is not sure whether Spain is an emerging market or not — he recently asked if it was a “BRICS nation.” However, he is sure that tariffs on the EU are coming “soon,” a threat with added weight now that he has fired his opening salvo against Canada and Mexico — even taking into account a month-long negotiated pause. These would be economically painful, divisive and potentially existential if they split the EU between friend and foe. What, if anything, can Europeans do about it?
The first thing to do is to take Trump seriously. His attack on US neighbors should snap Europeans out of the idea that Trump is full of hot air or that offering early concessions would spare the nation’s allies.
Trump’s presidency is fueled by belief that lifting US prosperity means breaking the chains that bind it monetarily, militarily and commercially to the global system. Tariffs are integral to putting this vision into practice, and close partners are seen as the best source of quick wins and behavioral change (as seen in Mexico and Canada’s negotiated pledges).
That makes the EU — seen as a trade distorter, unfair regulator and defense-free rider — a juicy target given its trade surplus. Insisting that the US would only harm itself by inflicting tariffs on a US$1.3 trillion trading relationship, however accurate, is unlikely to stay Trump’s hand.
This realization is dawning on European leaders such as French President Emmanuel Macron and German Chancellor Olaf Scholz, who have tried their best to not poke the Trumpian bear. Their more determined rhetoric on the need to take a stand should give the European Commission more confidence in planning a response.
There will be a negotiating component, as seen in offers to narrow the trade gap by buying more US goods, yet if that is not enough, then retaliation has to be on the table. Tit-for-tat responses are inevitably painful — they have been repeatedly dubbed “lose-lose” — and the EU would have to tread carefully given the rough state of its two biggest economies. However, someone has to define and defend European interests.
Expect a graduated response: A snap-back of tariffs on steel and aluminum next month; a potential extra targeted list of US products; and a signal that more could come, such as think tank Bruegel’s call for a broader tariff list.
It is at this point that things could get very ugly. The above scenario assumes a centripetal force bringing the EU’s 27 members together; yet a trade war would also unleash a centrifugal force driving them apart. Specific tariffs could easily be worse for some countries than others — Germany’s exposure to autos is greater than to French cheese, for example — and the bloc is weaker than during Trump’s first term.
Assuming the US imposes a 10 percent tariff, Nomura Holdings Inc estimates a 0.3 percent hit to European GDP growth in the next two years. Throw in rising voter support for populist parties adopting a Trumpian approach, and you have the ingredients of more social and national unrest against the Brussels elite. Trump might seek to exploit this by offering concessions to countries and companies based on their willingness to bend the knee; he might wield tariffs on NATO members with the promise of adjustments based on defense spending commitments. Imagine 27 last-minute “pauses.”
Which is why foresight and strategic planning — a big blind spot for the EU — have to be the final piece of the puzzle here. A recent Financial Times op-ed by European Commission President Ursula von der Leyen and European Central Bank President Christine Lagarde suggests a welcome commitment to promoting growth via less red tape, more innovation and looser monetary policy. Shoring up the home front would be critical to avoid slipping back into the technocratic habits that left the EU vulnerable to pandemic and war — and a reminder that member countries are geopolitically and economically stronger together.
Moreover, if defense burden-sharing is what Trump is really after, then he should get it in spades: The best way for the EU to respond long-term to trade threats is to invest in its hard power, with the logic of a 500 billion euro (US$520 billion) pan-European military fund rising by the day. Even in trade, the best defense is the literal kind.
Lionel Laurent is a Bloomberg Opinion columnist writing about the future of money and the future of Europe. Previously, he was a reporter for Reuters and Forbes. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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