First it was 10%, then 20%, now 50%. That’s the tariff Donald Trump wants to impose on all EU imports from 9 July. Initially he threatened to do it next Sunday, but he has now agreed to extend the deadline. “It was my privilege to do so,” he reminded us over the weekend.
The trade talks between the US and the EU have not been going well. This is because the two sides disagree fundamentally about the numbers and what they mean. The total trade volume between the EU and the US is $1 trillion. It is the world’s single largest bilateral trading relationship. The EU has a $230bn trade surplus — it exports more than it imports. The EU says its surplus is much smaller if you include services.
Bilateral numbers are complicated. I prefer to look at the bigger picture — the current account of a country against the rest of the world. That tells us that the EU has been running large and persistent surpluses for a long time. Trump is exaggerating. But he also has a point.
Trump wants the EU to pry open the Single Market to US-made cars and US beef. The EU imposes tough regulatory standards designed to protect domestic manufacturers and farmers from foreign competition. As the British know better than anybody, the EU is not flexible when it comes to the Single Market. If the talks fail, and Trump ends up imposing the high tariff, the EU will retaliate. Trump may then retaliate back. He may impose a punitive tariff on European wine and champagne, maybe also on luxury cars.
It would be time to get the popcorn out for what promises to be the ultimate geopolitical fight: a trade war between the world’s two largest trading partners.
A small tariff, like the 10% base tariff he announced on 2 April — Liberation Day — acts like a tax on consumers. We should not worry too much about it. Economically, it is not much different than our own VAT. Exporters and consumers will take it on the chin. A 50% tariff, or higher, gets us closer towards a trade embargo, because nobody in their right mind would pay this money unless they are desperate.
The view that I am picking up from Brussels is that it is worth putting up a fight because Trump will fold. After all, he already folded over China. I am not sure that this is a good comparison.
The best way to make sense of Trump is not in terms of what he says, or tweets, but in terms of what he decides. His actions tell us that he often rows back, but that he is also serious about trade tariffs. The 10% base tariff will stay. And so will the 25% tariffs for steel and aluminium, and for cars. We are not talking tariffs or no tariffs, but about 10, 20 or 50%.
His decisions so far also tell us that he is ready to cut deals for two specific reasons. The first relates to supply chain security. This is why his ludicrous tit-for-tat trade war with China unravelled. At one point, US tariffs on Chinese goods went as high as 145%. At those rates, no trade takes place. The port of Los Angeles became very quiet, very quickly. The shelves at Walmart emptied out. Trump got a lot of complaints from companies that relied on Chinese imports for their supply chains — often just small widgets that are difficult to source elsewhere. The problem was not that the Chinese goods suddenly became more expensive. They were no longer for sale.
There is the old joke that if you owe a small amount of money to a bank, you are in trouble. But if you owe a large amount, the bank is in trouble. Trump was the bank in this scenario. China is a big exporter, and the West has become dependent on it for critical supplies. Normally, in a trade war, the importers have the upper hand. But it always depends on what they are importing. If you are importing your drinking water, you are not in the stronger position.
Trump folded over China because he underestimated just how dependent the US had become. But the EU is not China. It exports luxury cars, like Porsche and Ferraris. The main US exports to Europe are oil, gas and airplanes, and of course digital services. The EU itself is not a player in the digital world. It can impose punitive taxes on digital services, but this would be deeply unpopular in Europe. It cannot source its digital services from anybody else, except China. It also badly needs US oil and gas.
But do Americans need a Porsche or an Audi? Or champagne? Or a Gucci handbag? Perhaps the most supply-chain critical EU exports to the US are machine tools from Germany, but there are often alternative suppliers from Japan or South Korea. Another potential dependency are pharmaceuticals. But there are huge stockpiles in US warehouses right now as the industry prepares for tariffs.
My European friends seem to be a tad optimistic in their view that the EU is in a stronger position. I see the EU as more dependent on the trading relationship with the US than the other way round. China is the boss in the US-China trade relationship. But the US is the boss in the US-EU trade relationship. In other words, the EU is not China.
The second reason that Trump might fold, or retreat, would be a bond market crash. He already pulled back when the markets panicked over his Liberation Day tariffs. But I am not persuaded that this prospect will cause him to be gentle toward the EU. A US president can do things to quell a bond market crisis, like forcing the central bank and the banks to buy government bonds. That does not stop a crisis from happening in the first place. The bond market vigilantes absolutely hated Trump’s budget last week. Moody’s, the rating agency, downgraded US debt in anticipation. The so-called reconciliation bill passed the House of Representatives with a single vote, but the bill has now run into stiff opposition in the US Senate, including from Republican senators. If passed, it would lead to an explosion of US debt in the long run, and endanger the role played by the US dollar and US treasury bonds in the global financial markets. A failure of the US-EU trade talks would not be the cause of global bond market rout — but it could be a trigger.
That might help the Europeans. But they could easily get caught up in it too. It is not as though Europe is a safe haven. France and Italy have even higher rates of debt than the US. Germany’s debt is projected to rise, and its economic growth is weak. If anything were to happen to the US bond market, I don’t think it would reshuffle the cards in the US-EU trade relationship much.
This is why, in the language of Trump, the EU does not hold strong cards. One big problem for the EU is that Ursula von der Leyen, the European Commission president, is not an equal partner in the trade talks. She cannot force the French to open up their agricultural markets to US beef or loosen the regulatory protection that mollycoddles the German car makers. Whatever she offers, she has to get approval from EU leaders first. It is easier for the EU to say No in the EU’s 24 official languages than to say Yes, because that a Yes would require agreement from the EU’s 27 leaders.
“Whatever von der Leyen offers, she has to get approval from EU leaders first.”
Trump’s ideal counterpart in a negotiation is a king, a tyrant, or a British prime minister. On matters such as trade or investments, they are all principal agents. If Keir Starmer says the food standards come down, they will. He has a massive majority in parliament. The European Commission is not a principal agent. It is more like an estate agent. It collects offers for consideration.
If the Europeans were strategic, they should let Trump be Trump, not retaliate, and instead focus on solving their internal problems: they could open up the clogged Single Market, reduce bureaucracy and cut business taxes. Its internal barriers are bigger than any external tariffs imposed by Trump. But that is not the mood in Brussels right now. They are up for a fight.
They want to fight Trump on the western front, and Vladimir Putin in the East. They think they are on course for a glorious victory in Ukraine, and that they end up putting Trump in his place and get the American voters to see the error of their ways. Well, good luck with this. My own sense is that the purpose of Trump’s policies is to divide Europe. For example: What consequences would a high tariff on the EU and a low tariff on the UK have for the UK-EU trading relationship?
If this is the goal, he will probably succeed.
