Tariff Bullying Is Working Too Well in Europe

Donald Trump's April tariff barrage felt like the height of hubris. It infuriated allies, damaged his popularity at home and triggered financial-market chaos so acute the whole thing was paused within days — the latest sign of America’s Icarus-like tendency to try to remake the world every few decades. Yet three months on, as the deadline for a compromise looms, Europe’s own syndrome risks emerging: a tendency to look more like a collection of Asterix villages than a cohesive whole.

It’s now looking increasingly likely that the European Union’s 27 members, whose common trade policy is led by Brussels, will be faced with what is called an “asymmetric” deal. There will be no removal of all tariffs imposed or threatened by Trump, including a baseline levy expected at 10%. If that’s the case, the UK’s bare-bones deal — which failed to cancel its own 10% tariff or a 25% levy on steel and aluminum — has become a kind of precedent: a few carve-outs, a gushing tweet and hope that Trump moves on. Canada has also become a precedent, withdrawing its digital services tax on tech companies after the US made it a red line for talks. Financial markets see cause for cheer as a de-escalation path takes form.

The question then becomes whether — or how — the EU retaliates. Aside from responding to the economic hit against an export flow worth $605.9 billion last year, from Airbus SE airliners to Volkswagen AG cars, not doing so might be a signal that bullying works. Last week, NATO allies agreed to more than double defense spending targets to 5% of gross domestic product (of which 1.5% would go on related infrastructure), addressing a Trumpian bugbear while also ensuring more orders for US arms. G-7 allies also appear to have offered concessions on global taxation of US companies in return for the dropping of a “revenge tax.” The EU has been offering other carrots for months, from buying more US imports to cooperating on China. Hence why Danish Prime Minister Mette Frederiksen warned it might soon be time to “respond in kind.”

The thing about retaliation is that it requires unity, especially if the idea is to go beyond goods and into services provided by dominant US firms like Alphabet Inc. or Amazon.com Inc. And even if the EU Commission is taking a strident tone, the combination of geopolitical risk and weak economic growth doesn’t generally inspire unity. Few heads seem willing to rise above the parapet. German Chancellor Friedrich Merz wants to get on with delivering on lofty promises of national renewal, not get bogged down in a tariff war. Italy’s Prime Minister Giorgia Meloni might want to preserve her relationship with Trump, which was on display at the North Atlantic Treaty Organization summit. Countries to the east, closer to the war in Ukraine, are more focused on access to American hard power, as displayed in spectacular fashion in Iran.

And while French President Emmanuel Macron will want to play the role of trade warrior, even his administration might see the value of a focus on securing protections for its own industries like aerospace. Spain, the most recent target of a verbal lashing from Trump, seems somewhat isolated and hasn’t rallied much of a wave of solidarity. During the Brexit saga, the UK’s oft-repeated mantra was “no deal is better than a bad deal.” Nobody is saying that in Brussels these days, even as officials try to uphold red lines on defending existing regulation. Such is life when faced with the closest thing the world has to a superpower — and when dependency on said superpower runs deep, from security to technology.

To be clear, the EU is hardly powerless in trade; and after deepening cooperation with Japan and Canada, there will be added impetus to cut new deals elsewhere. As for the US, a last dash for the finish line may produce a better outcome than the one currently on the table.

But either way, the lesson for the EU is it must address the dependencies that help the bullying work. That will require collective action: on a defense industrial base that reduces fragmentation and increases innovation, on a capital market that’s failing to create and scale up new companies and on the technological gaps that make talk of sovereignty unconvincing. Icarus syndromes are quickly shaken off, but Asterix syndromes last forever.

Source: Bloomberg Europe