The EU Can Play It Cool With Trump’s Trade Threats

Other governments have so far taken three main approaches to dealing with Donald Trump’s trade threats. China hit back hard at the U.S. president’s tariffs and got him to back down partly. Canada also retaliated and avoided some of the pain Trump inflicted on other countries. Meanwhile, Britain cut a quick deal that favoured the United States. None of these is a model for the European Union.

The 27-member group is not China. Though its bilateral goods trade, opens new tab with the United States last year was worth 70% more than between the U.S. and the People’s Republic, opens new tab, the EU is not an autocracy that can outpunch Trump. If it antagonises the U.S. president, he might up the stakes by pulling the rug from under Ukraine and undermining the EU’s defences. American hard power gives it what geopolitical strategists call “escalation dominance”.

The EU is not Canada either. Ottawa was able to hang tough because its people were infuriated that Trump was trying to blackmail Canada into becoming part of the United States. While anti-Trump sentiment is high, opens new tab in the EU, politicians who are sympathetic to him, such as Poland’s new president, can still get elected.

On the other hand, the EU is not the United Kingdom. Both are at risk from Russia’s invasion of Ukraine. But the EU trades seven times more goods with the United States than Britain, opens new tab does - so Washington has more to lose if economic relations break down.

There is another way for the EU to handle Trump’s threats: play it cool. That is more or less what the bloc is doing. It involves neither escalating the conflict nor accepting a bad deal. It means being open to a good agreement if the U.S. lowers its demands, but willing to play the long game if it does not.

One reason to buy time is to help Kyiv. The longer the EU has to prepare its own support package for Ukraine, which should include getting it a lot of cash, the less the damage if Trump ultimately cuts off all U.S. aid to the country.

The president’s own vulnerabilities may also increase over time. Just look at the spectacular end of his alliance with Tesla (TSLA.O), opens new tab boss Elon Musk. The fragile U.S. trade truce with China may break down causing more financial turmoil, making Trump less keen to pick a fight with the EU. If the Supreme Court stops him using emergency powers to impose tariffs, his negotiating position will be weaker. And tariffs could hurt the U.S. more than its supposed victims, by pushing up inflation and crimping growth.

A QUICK DEAL?

Trump has zig-zagged in his trade threats and actions against the EU. The current state of play is that there are 50% tariffs on U.S. imports of steel and aluminium from the bloc, a 25% tariff on cars and 10% so-called reciprocal tariffs on most other goods.

The U.S. president has threatened to jack up these reciprocal tariffs to 50% if there is no deal by July 9. He is also looking at more “sectoral tariffs”, including on pharmaceuticals and semiconductors.

While the EU has complained to the World Trade Organization (WTO), it has delayed its own retaliation. Its negotiators accept that they are unlikely to overturn the reciprocal tariffs, the Financial Times, opens new tab has reported.

The bloc still aims to avoid the sectoral ones. Those on cars and any on pharmaceuticals would hurt it the most. It has dangled the possibility of buying more U.S. equipment and natural gas to get a deal.

An agreement on those lines could be good for the EU. It needs to beef up its defences and eliminate its purchases of Russian gas. While it would be best to have its own arms and energy supplies, buying more from the U.S. makes sense as an interim measure. An important nuance, though, is that the EU should reserve the right to take action against the reciprocal tariffs after the WTO issues its verdict, says Ignacio Garcia Bercero, opens new tab, a former senior EU trade official.

Such a pact would involve quite a climbdown by Trump. True, arms and gas purchases would narrow the U.S. goods deficit with the EU, which was $236 billion, opens new tab last year. But his administration has a host of other complaints including the bloc’s value-added tax and food safety standards as well the digital taxes that some of its members impose on tech giants. It is hard to see the bloc agreeing anything in those areas, says Simon Evenett, professor of geopolitics and strategy at IMD.

BACK TO WAR?

Although the U.S. side described last week’s trade talks with the EU as “very constructive, opens new tab”, discussions could easily break down. The question then is how the bloc would react if Trump imposed higher reciprocal tariffs.

The EU has so far imposed no countermeasures. Though it has agreed to tax 21 billion euros of U.S. imports in response to the steel and aluminium tariffs, it has delayed these until July 14 to try to get a deal. The European Commission, its executive arm, is also consulting on taxing a further 95 billion euros of U.S. imports in response to the car tariffs and the reciprocal ones. But added together, these tit-for-tat measures would be equivalent to only a third of the 379 billion euros of EU imports subject to Trump’s tariffs.

Some analysts, opens new tab think the bloc needs to be tougher. One idea is to crack down on American services, where the U.S. had a 109 billion euro, opens new tab surplus with the EU in 2023. Another is to activate its “anti-coercion instrument, opens new tab”, which would allow retaliation against U.S. companies operating in the bloc. Yet another is to threaten to ban exports of critical goods, such as the lithographic equipment necessary to make semiconductors.

Extreme events may require extreme responses. But for now, the EU should keep its cool. It should not kid itself that it is stronger or more united than it is. It should remember that Trump may get weaker with time. And it should never forget Ukraine.

Source: Reuters