Brussels has come up with a dual-faced approach to managing trade relations with Donald Trump, contingent on his potential re-election as president. The plan involves offering an immediate deal aimed at the Republican if he secures a second term. Conversely, they are willing to implement specific reprisals if he decides to impose punishing tariffs instead.
European Union officials regard this nurturing yet assertive technique as the most effective reaction to Trump’s commitment to implement a minimum tariff of 10%, which is expected to reduce EU exports by a staggering €150 billion annually.
The EU strategy, should Trump secure victory in the November elections, is to engage the Trump administration before he officially resumes office, for preliminary trade negotiations, centred around which American goods the EU could purchase in larger volumes.
However, the European Commission’s trade department is also preparing a counterstrategy, in the event that trade discussions collapse and Trump resorts to elevated tariffs. This contingency plan could see the introduction of up to 50% duties on identified imports.
A high-ranking EU official expressed that their stance is to demonstrate that they are an ally of the US, not an issue. The EU seeks to negotiate deals but is also prepared to protect its interests if necessary. They are not intending to be driven by fear.
The years between 2017 and 2021, which marked Trump’s first term, were challenging for the EU, which has a significant trade surplus in goods with the US. The introduction of tariffs on steel and aluminium imports from the EU worth €6.4 billion by Trump in 2018, citing national security risks, led to the EU retaliating with balancing tariffs with the estimated value of €2.8 billion.
In implementing these measures, Brussels strategically targeted Trump’s key voting demographics by imposing exorbitant duties on products like Harley-Davidson motorcycles, bourbon whiskey, and power boats. A tentative agreement with the Biden administration has seen these tariffs suspended until March, pausing the metals tariffs.
EU trade commissioner Valdis Dombrovskis expressed optimism that the EU and the US could find a way to avoid replicating past conflicts. He emphasised that the US and EU are strategic allies, and in the current geopolitical landscape, it is crucial that both sides collaborate on trade.
The Latvian official asserted that they had defended their interests through tariff imposition and were prepared to do so again as needed. He encouraged a collaborative approach and indicated Brussels’ willingness for carefully considered agreements to mitigate the €156 billion trade deficit in goods.
During his initial tenure, Trump was able to secure a deal on lobsters, a significant source of income for Maine – a state he aspired to carry in the 2020 presidential elections. Maine had given a rare victory to a Republican governor and representative in 2016. The recent free trade agreement between the EU and Canada had led to falling U.S. export revenues as reduced prices favoured Canadian shellfish.
The EU, in keeping with global trade rules, removed tariffs on U.S. imports of live and frozen lobsters along with products from other nations that did not have a pre-existing trade agreement. Consequently, the U.S. reduced taxes by 50% on a range of goods including crystal glassware and lighter items. More agreements on beef and soybeans were made to satisfy Trump’s voter base in the midwest.
Despite this, the annual U.S. trade deficit escalated to €152 billion in 2020 compared to €114 billion in 2016 when Trump was first elected. With the 2022 Ukraine invasion by Russia, the EU began importing considerable quantities of liquefied natural gas as an alternative to Moscow supplies. Under the Biden administration, the U.S. deficit maintained at €156 billion in 2023.
However, EU officials have stated that significantly expanding U.S. exports is challenging, as they are generally less valuable than those from the EU. While commodities form the major part of the U.S. export, EU exports generally include pharmaceuticals, vehicles and high value food and drink like champagne. The subpar growth rate of the EU economy in comparison to the U.S. is creating a demand slump.
Goldman Sachs’ chief economist, Jan Hatzius, has recently forecasted that a tariff war would hit the EU harder than the U.S., resulting in a 1% reduction in the EU’s GDP as compared to 0.5% in the U.S. However, the U.S. could see a 1.1% inflation rate increase compared to the EU’s 0.1%.
Brussels policymakers anticipate that Trump may refrain from stoking inflation amidst voter concerns about living costs. In the words of a senior official, the EU is better equipped to handle whatever future challenges may arise, as per The Financial Times Limited 2024 Copyright.
Subscribe to our Business push notifications and receive top-notch news, insightful analysis, and commentary direct to your mobile device. Also, look forward to our Inside Business podcast that is released on a weekly basis – you can access the most recent episode here.