How Europe could try to avoid future Trump tariffs

Donald Trump’s US election victory has left Europe thinking about how it can contain or counteract the highly likely tariffs on its exports to the US once the president-elect enters the White House.

Before his decisive election victory last week, Trump had already threatened to revive a trade war that began during his first term, declaring on the campaign trail that he would increase tariffs on Chinese goods by 60-100% and impose a punitive tariff of 10 to 10 percent 20% on all US imports.

Trump sees the protectionist measure as a way to boost U.S. jobs and growth, but the policy would undoubtedly open a new front in the trade conflict with two of the country’s largest trading partners, the EU and China. Critics of the proposed tariffs say the policy could lead to higher prices for U.S. consumers.

While Trump is known for his unpredictability, meaning his rhetoric when it comes to policy sometimes falls short, analysts agree that the president-elect appears to be unwavering when it comes to trade tariffs and opined that the The term itself “the most beautiful word of all” is the dictionary.”

Therefore, Asia and Europe need to think quickly about how to mitigate the future impact of export tariffs and whether to retaliate or attempt to negotiate an exit deal. Economists warn that it is uncertain whether Trump’s tariffs on Europe will be “as damaging as feared,” as ING economists noted in a note last Friday, or whether they are simply “a negotiating tool to unlock broader foreign policy agreements.” becomes.

Nevertheless, there were calls in Europe that the Union should now prepare retaliatory measures. The director of Germany’s Ifo Center for the World Economy appealed to Germany – which relies heavily on trade with the US, particularly with regard to vehicle exports – and the EU to “strengthen their position through their own measures.”

“This includes deeper integration of the EU services market and credible retaliatory measures against the US,” said Ifo’s Lisandra Flach last week. The proposed measures include the possible use of the EU’s new “anti-coercion instrument”, which offers the region a wide range of possible countermeasures if “a country refuses to eliminate coercion”.

Countermeasures include the imposition of tariffs, restrictions on trade in services and trade-related aspects of intellectual property rights, and restrictions on access to foreign direct investment and public procurement. Germany and the EU could also increase cooperation with individual US states, Flach suggested.

But economists also say the EU could try to use the carrot rather than the stick with the US, suggesting there are three other ways Europe could try to stop, limit or avoid Trump’s likely tariff policies.

As a starting point for the new Republican administration, European leaders could aim to avoid tariffs altogether, economists say, by offering to boost select American imports in exchange for the U.S. granting them an exemption from the tariffs.

“This can also include LNG [liquefied natural gas] and soybeans, both of which were part of a deal between Donald Trump and the then President of the United States [European Commission] Jean-Claude Juncker in July 2018,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a note last Friday.

Analysts at Eurasia Group led by Mujtaba Rahman commented that a “transaction strategy” would likely be initially pursued by European Commission President Ursula von der Leyen. In doing so, the EU would be guided by the goal of strengthening US exports in key sectors such as agriculture, energy (LNG) and defense.

“The EU will likely pledge to further expand LNG imports from the US. Von der Leyen could also examine the conclusion of two agreements that the Commission negotiated with President Joe Biden, namely the Global Arrangement for Sustainable Steel and Aluminum and an EU-US Critical Minerals.” An attempt to negotiate the EU-US trade deal and Technology Council to achieve more is likely, which has helped foster some cooperation on digital issues such as AI and export controls,” Eurasia Group analysts noted.

Alternatively, Kenningham said, the two sides could “reach a broader geopolitical agreement to avert the tariff threat.”

“The EU could, for example, commit to buying more defense equipment from the US to continue supporting Ukraine – although it would be difficult for the EU to agree on how to raise the funds, given many , including Germany, are bitterly opposed to more joint EU borrowing.”

A deal is likely to be beneficial for European politicians as they seek to limit the economic impact of a 10 percent U.S. tariff on European exports. “The key point is that while we assume there is a 10% US tariff that only takes 0.2% off eurozone GDP, the result could be lower if the EU manages to reach a deal “” Kenningham said.

However, whether Europe can reach a consensus there about how or whether a deal with Trump can be reached is controversial. Carsten Brzeski, global head of macro at ING, said in a post-election note last week: “Trump hits Europe not only at a time of economic weakness, but also a time of political instability.”

“During the first Trump term, Emmanuel Macron and Angela Merkel were a strong political axis. Today France is fighting and the German government has just collapsed. There’s not exactly a strong bulwark,” he said. “It really casts doubt on Europe’s ability to find adequate responses to Trump,” he added.

Another possibility is that Europe could agree to align its policy toward China more closely with that of the U.S., Capital Economics’ Kenningham noted.

This could lead to further barriers to the import of Chinese electric vehicles and other technologies, as well as a restriction on foreign direct investment from China and increasing restrictions on the export of high-tech goods such as lithography machines.

Capital Economics’ Kenningham acknowledged that the EU would be “hesitant to cut ties with China too drastically,” but said policymakers may be forced to do so if they face strong pressure from the United States.

Analysts at Eurasia Group agreed that the EU’s “most difficult policy response is likely to be towards China, as Trump’s return would make it more difficult for the EU to determine its third-way ‘decoupling’ strategy.”

“If Trump starts a trade war with China, the EU could benefit in the short term if the US focus is solely on China and not the EU. Beijing would also be less likely to counter Brussels’ trade measures as it battles Trump and the US.” “The EU is likely to seek common cause with Washington in some areas, such as advanced chips,” the analysts noted.

“Ultimately, however, Trump is likely to drive forward the structural tightening of EU policy towards China. This would pose the biggest challenge for Germany as Chancellor Olaf Scholz is hesitant to even join the EU’s milder risk reduction strategy.”