How the EU should deal with Trump’s tariff threat

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Donald Trump says tariff is a “beautiful word”. But he also prides himself on being a dealmaker. So the EU approach to the president-elect’s tariff threats suggested by European Central Bank president Christine Lagarde in an FT interview — “not to retaliate, but to negotiate” — makes sense, at least initially. Any EU offer to buy more US goods to head off a rancorous trade war should, though, be backed up by the understanding that the bloc is ready to retaliate robustly if the returning president does opt for punitive tariffs. Trump would surely seize on anything less as a sign of weakness.

The trade threat was amplified when Trump last week pledged day-one tariffs on Canada and Mexico and additional duties on China — highlighting a willingness to blow up supply chains even with America’s biggest trading partners. On Saturday, he threatened tariffs of 100 per cent on Brics countries if they undermined the dollar. But tariffs appear as much a negotiating tool as an ideological goal. Managing trade with the Trump’s US is set to be a central task of the new European Commission, whose term officially began on Sunday — particularly given the EU’s sizeable trade surplus with the US.

Brussels has already floated buying more US energy, military and agricultural goods as a concession. Importing more US liquefied natural gas would help the EU finally to ban remaining Russian LNG imports. Europe will need US-made weaponry, too, if it is to shoulder more of the burden of defending Ukraine. This approach neatly targets two Trump priorities at once: the EU can say it is bolstering its energy and military security while helping US producers.

But the European Commission is right to keep a stick to hand as well as carrots, with plans to hit back if Trump plumps for tariffs. It is understood to have drawn up retaliatory duties that would particularly hit Republican-led US states. Indeed, EU duties on bourbon whiskey, power boats and motorcycles, imposed in 2018 after Trump introduced tariffs on steel and aluminium imports from the EU and elsewhere, are currently suspended until March.

These could provide a bargaining chip — though Trump seems to care relatively little about hits to the US real economy from his arm-twisting on trade. Maintaining EU unity over its response will be vital given the temptation for member states to seek US favours to protect their own interests.

To improve the chances of the global trading system weathering the Trump storm, Brussels should also try to ensure any deal with the US — and response to potential “collateral” damage from Chinese imports diverted from the US — does not ride roughshod over trade laws. The 2018 package offered by then commission president Jean-Claude Juncker that fended off US tariffs on EU car exports, which Brussels’ approach today partly echoes, bent some internal EU rules, but was not a terrible abrogation of WTO law.

There are already inevitable calls — including from new European Commission vice-president Stéphane Séjourné — for a “Europe first” strategy for key business sectors. Certainly, if Trump does increase US tariffs on Chinese goods, the EU is likely to face tricky talks with Beijing on limiting a flood of Chinese exports, similar to western talks with Japan in the 1980s, or have to restrict them — with likely knock-on effects on its own exports to China.

Though the EU punches below its weight geopolitically, on trade it has a credible record of trying to uphold the rules-based order. Onerous trade-offs lie ahead. But even as it seeks to defend Europe’s economic interests, Brussels should do all it can to remain a positive force on trade, rather than being sucked into the vortex of an all-out trade war.