What the European Union should expect from Trump’s tariffs

Donald Trump’s decisive victory in the US election shows that the notion that America First protectionism was an aberration was wrong. Supported by powerful constituencies in swing states, America First responds to fundamental forces at work over four decades: the progressive abandonment of the US’s self-appointed role as caretaker of the liberal rules-based system in the post-Soviet world, China’s rise as arch-rival, and the backlash against neo-liberal policies that came with high inequality, surging immigration and the estrangement of less-skilled native workers, especially men. Trump has channelled these forces into a juggernaut political movement.

Trump’s intention to raise tariffs gives the lie to another form of wishful thinking: that the fragmentation of the world economy into blocs will be along straightforward geopolitical lines, with China and its allies on one side and the US on the other. It will be much messier than that. Trump’s tariffs will disrupt trade between the US and its allies, and will also create tensions as – reflecting divergent economic and security interests – the US’s allies will respond differently.     

Trump has an extensive list of instruments he can use to target countries individually, even without resorting to Congress, and the courts have historically given presidents wide berth in trade policy. Furthermore, control of Congress may allow Trump to push an across-the-board tariff increase quickly.

However, tariffs may not all come at once. Trump may opt for a negotiated and sequenced approach for three reasons:

• Trump’s approach is transactional, as he showed in the United States-Mexico-Canada Agreement negotiation, and the Phase One deal with China. Trump is a convinced protectionist, but he also believes the US is powerful enough to use trade as a lever to get much better deals, and not just on trade. What he wants from Mexico is not what he wants from the European Union, or from China.  

• He must be wary of inflation. Election post-mortems suggest that high prices were the main cause of the Democrats’ debacle. The extent to which 60% tariffs on China and 10%-20% on everyone else would raise US prices depends on how much partners cut prices from their pre-tariff levels, domestic producers raise prices in tandem with higher post-tariff import prices and the dollar appreciates in response to the tariffs. My best guess is that tariffs will have a one-time 2%-3% impact on US prices. But against a background of other supply restrictive and demand-expansive measures, including lower immigration, deportations, tax cuts and looser monetary policy, tariffs that come all at once could trigger a new inflation cycle.

• A unilateral tariff hike without prior negotiation increases the likelihood of coordinated reprisals by US trading partners. It would be more effective to pick them off one by one – tougher on some, easier on others, depending on the US demands.

Harking back to pre-Adam Smith thinking, Trump measures trade gains by the size of the US trade balance. Through that lens, the top offender is China, which runs the largest trade surplus with the US, $254 billion. Mexico is second ($154 billion), then the EU ($107 billion, of which Germany, $86 billion) and Japan ($62 billion).

If US partners agree to asymmetric and discriminatory deals, such as forced purchase requirements, or face tariffs, the World Trade Organisation will be further damaged, perhaps irretrievably. There will be many unintended consequences and policy uncertainty will soar. For example, were China to decouple from the US, it will seek to reorient its exports to large markets such as Japan and the EU, even as its growth slows and it imports less, heightening tensions even more. If there is a silver lining, Trump is unlikely to favour industrial subsidies as Biden did.

Trump will be less inclined than Biden to treat China and Russia as arch enemies. That may open the door to trade deals that once appeared implausible, but may also entail a compromise in the Russia-Ukraine conflict that the EU will find repugnant.

The EU must consider carefully whether it should negotiate. The last major negotiation with the US (the Transatlantic Trade and Investment Partnership) took 15 rounds over three years and was friendly, but failed soon after Trump’s election in 2016. A negotiation with Trump under duress will be much tougher. EU purchases of US natural gas, agricultural products and arms may be required as part of a deal.

If the EU is unable to stomach the one-way concessions Trump will demand, it must be made clear that the EU is ready to retaliate. EU internal divisions that create doubt about the commitment to do so only increase the likelihood of bad outcomes.

The EU’s dilemma shows that trade and security are inextricably linked. How can the EU retain its trade autonomy while being so dependent on the US for its defence? How does the EU manage its trade differences with China without turning it into an enemy? What is certain is that the EU cannot afford to fight a trade war on two fronts.

This First Glance was also published on Makronom in German and on Le Monde in French..