‘TARIFFS all the way!!!’: EU mulls carrots and sticks to counter Trump on trade

 

Analysis

‘TARIFFS all the way!!!’: EU mulls carrots and sticks to counter Trump on trade

Jennifer Rankinin Brussels

Bloc may ward off incoming president’s threats by buying more US goods, or impose its own tariffs in retaliation

Thu 16 Jan 2025 14.44 GMT

https://www.theguardian.com/world/2025/jan/16/tariffs-eu-carrot-and-stick-policy-donald-trump-presidency

 

If there is one thing the EU knows about Donald Trump, it is that he loves tariffs. The incoming president has said “tariff” is “the most beautiful word in the dictionary” and has threatened to impose them on US allies around the world.

On the campaign trail he proposed tariffs of 10-20% on imports from all countries, with a 60% rate reserved for China. Once elected, he tweeted that the EU must buy more US oil and gas “otherwise it is TARIFFS all the way!!!” This week, he announced he would create an “external revenue service” on the day of his inauguration.

The European Commission, which leads on trade policy for the EU’s 27 member states, has been preparing for the next US president since last summer. Details of its response to potential tariffs are closely guarded though, and depend on what the volatile incoming president actually does.

It is understood that the commission has a twofold, carrot and stick approach. The sticks are the EU’s own retaliatory tariffs, while the carrots include offers to buy more US goods. Before Trump’s social media outburst, the commission’s president, Ursula von der Leyen, proposed that the EU could buy more liquefied natural gas from the US to replace the LNG it buys from Russia.

However well-prepared the EU is, officials are concerned about a possible trade war. The EU and US traded a record €1.54tn (£1.3tn) in goods and services in 2023. Commission officials describe that trade as “balanced”, pointing out that the EU buys more services from the US than it sells in return. But Trump tends to focus on trade in goods, where the US runs a deficit. “They don’t take our cars. They don’t take our farm products. They sell millions and millions of cars in the United States. No, no, no, they are going to have to pay a big price,” he complained on the campaign trail last October.

Even a 10% tariff would hurt European exporters, especially Europe’s beleaguered car industry. And if Trump followed through with his threatened 60% tariff on Chinese goods, the EU would face political pressure to follow suit, as well as a potential glut of cheap Chinese goods on world markets, depressing prices and damaging business for European producers.

“The EU needs to be prepared for all eventualities,” Ignacio García Bercero, a former director at the European Commission’s trade directorate-general, said. Also a former EU-US trade negotiator and now a fellow at the Bruegel thinktank, he does not think Trump’s first move will be “something so radical” as 10-20% tariffs across the board, because of the “very disruptive” consequences for the US economy. Economists expect tariffs to increase US consumer prices and reduce household income and the size of the economy. Initially, at least, Trump’s tariffs are “a threat rather than something which is actually implemented”, García Bercero said.

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Chickens in Osage, Iowa. Trump wants the EU to buy more American farm products. Photograph: Scott Olson/Getty Images

He thinks the EU’s first priority should be to try to avoid tariffs, but in a paper he calls for “a credible threat of retaliation”. In response to Trump’s imposition of duties on European steel and aluminium in 2018, the EU hit back with duties on iconic US goods such as Harley-Davidson motorbikes, bourbon and orange juice from politically sensitive Republican states.

This time around, the EU faces a more wide-ranging threat, potentially affecting all goods. García Bercero suggest the EU opts for a “negative list” ie mirror tariffs on all US goods, with exemptions for products that are critical for European buyers, such as LNG.

EU officials have studied the playbook pursued by the previous European Commission president, Jean-Claude Juncker. After Trump imposed duties on European imports of steel and aluminium, Juncker persuaded him to drop the threat of tariffs on European cars by promising to buy US soya beans and natural gas, as well as launching talks on trade liberalisation. The commission did not have the power to compel private companies to buy US soya beans, but jumping on a favourable market trend helped to deflect punishing tariffs.

Sam Lowe, a partner at the business consultancy Flint Global, thinks governments around the world are looking at similar strategies, especially as Europe looks to replenish defence stocks. “There is a theory that we’re going to be buying all this American equipment anyway. Can’t we just package it up and put a big number on it? And if that works, brilliant,” Lowe said. “The uncertainty is over whether that’s going to be enough.”

It is unclear whether Juncker’s trick can be pulled off by Von der Leyen, a German Christian Democrat in the tradition of Angela Merkel, the former German chancellor who was treated coldly by the erratic US president.

Other European leaders have closer ties to Trump, including Italy’s Giorgia Meloni and Hungary’s Viktor Orbán, but it is uncertain these Eurosceptic leaders would use favoured access to promote the EU’s common interest. “One of my fears is that [Trump] drives division in the EU and undermines a coordinated EU response by singling out some member states for preferential treatment,” Lowe said.

“It is difficult to predict what the reaction would be if, for example, he threatened tariffs on the entire EU, but announced he was going to exempt Italy, Hungary, Austria and the Czech Republic.”

Adding to the complexity is how the EU’s regulatory powers may provoke the ire of Trump’s acolytes. The commission has ongoing investigations into Elon Musk’s X and Mark Zuckerberg’s Meta, and the two tech leaders have moved closer to the Maga orbit to win Trump’s favour. On the campaign trail, Trump’s incoming vice-president, JD Vance, linked US support for Nato to the EU’s treatment of X. He did not spell out what he meant, but it indicates how different issues could be yoked together to pressure Europe.

Faced with an unpredictable US, the EU will be looking for common approaches on trade with like-minded developed nations, such as Japan and the UK. Speaking to journalists in Brussels last month, the UK chancellor, Rachel Reeves, said London would always be “arguing for free and open trade” but would not pick a side.

The UK is deeply reluctant to get caught in a trade war, but it may have no choice. If talks with Trumps’s White House break down, Lowe said, “and we are in a full-blown trade war scenario” with the EU imposing tariffs in retaliation, “I think, at that point, the UK would have to at least think about it.”

So far the EU has sounded united. Just days after Trump’s victory, the EU’s 27 leaders adopted a declaration pledging a trade policy that “defends and promotes the EU’s interests”. But the true test of that unity only begins on 20 January, once Trump is back in the White House.