The EU’s response to Donald Trump’s tariffs seems to work
“SHE SCOLDED me for half an hour, saying I was a complete idiot,” quipped Robert Fico, Slovakia’s prime minister, on March 31st. Ursula von der Leyen, the president of the European Commission, had just called to chastise him for speaking bilaterally with the Trump administration about tariffs. He had violated the first rule of the European Union’s trade-fight club: you, national leader, do not talk about trade. The EU speaks with one voice.
It also acts methodically. On April 9th the bloc agreed on its retaliation for Donald Trump’s steel and aluminium tariffs, imposed on February 10th. How to answer his subsequent car tariffs and capricious “reciprocal” tariffs will be decided later, illustrating another rule: one fight at a time.
The approach seems to work well. Crashing stockmarkets (see chart) and China’s swingeing counter-tariffs (up to 84% now) may have given Mr Trump enough pushback. On the same day as the EU’s counter-tariff decision, he backed down and lowered his latest tariffs for 90 days to 10%. The exception is China, the only country that retaliated against them immediately. Its rate is now 125%.
A blanket tariff of 10% is still high and unjustified. But Europe has one big advantage. Unlike America, it is still trading with the rest of the world on the same terms as before. That will limit the damage. “It’s a matter of reassigning resources and markets,” said Alvaro Muñoz, the CEO of AMFRESH, a big Spanish fresh-produce company. In a topsy-turvy global economy, the EU’s rule-loving bureaucracy is now an asset, promising stability. Europe does not have to engage in a pointless trade spat.
The current relief gives policymakers yet more time to find the right response. Giorgia Meloni, Italy’s prime minister, is preparing a visit to the White House to negotiate on Europe’s collective behalf. Germany’s new government and its chancellor, Friedrich Merz, will now be able to play a stronger role in shaping the response, after being preoccupied for many weeks by coalition negotiations.
Unity will be paramount. Mr Trump missed one opportunity to sow discord. His tariffs treat the EU as a single trading bloc, as it legally is; applying different rates to different countries would pit them against each other (see chart). Even so, there is plenty the EU and its firms disagree on. Emmanuel Macron, France’s president, hosted industrialists at the Elysée to urge them to suspend investments in America. Not everyone was pleased. German officials fear that firms may lobby for favours in Washington, undermining the EU’s response. Politicians who have always wanted to go after American tech firms want to use the trade war as an excuse; Ireland, which hosts many such firms’ European headquarters, is horrified. France and Italy successfully pleaded to exempt whisky from EU retaliatory measures for America’s steel tariffs, lest Mr Trump take revenge with a 200% levy on European wine.
Under EU law, counter-tariffs are for the commission to set, unless a qualified majority of member states block them. But heavier countermeasures, such as restricting market access, require a qualified majority in favour. And some policies, such as taxing tech giants, are in national hands. Ms von der Leyen has repeated an old offer to eliminate tariffs on industrial goods between the EU and America. But Mr Trump rejected the bid immediately, demanding the EU buy $350bn-worth of American fossil fuels (roughly its total annual energy imports). The EU is likely to raise the offer again, if only to signal its intentions.
Europe’s response will probably combine three things. First, it will show strength. As with metals, the EU will retaliate against the car tariffs. It will also put together a response to the now-lowered across-the-board tariffs, to signal that it does not intend to roll over (and will use its huge market for leverage). There is disagreement, though, over using its fiercest tool: the anti-coercion instrument (ACI). The ACI allows the EU to use a range of measures beyond tariffs to hit back at countries that exert economic pressure on its members. These could include blocking the export of products Americans will find hard to replace, or excluding some American companies from the European market. Since Mr Trump has backtracked, the ACI will probably stay in the toolbox for now.
The second element is ratcheting up tariffs to push for negotiations. Mr Trump imposed steel and aluminium tariffs first, automobile tariffs second and the new “retaliatory” tariffs third. That lets the EU escalate gradually too. The metals tariffs affect EU exports of about €26bn, but the bloc decided to hit back against a smaller quantity of American exports, signalling that it does not want a trade war. After it retaliates for auto tariffs, it will proceed to respond to the broader tariffs.
The third part will be support for European businesses. Mr Sánchez met business leaders immediately after Mr Trump’s initial tariff announcement on April 2nd and presented a €14bn plan, including €5bn in credit guarantees to firms that have lost orders. (The Spanish leader spoke in front of a billboard reading “Our values are not for sale, our [wines] are”.) Other countries are sure to offer relief to their own firms. For its part, the European Central Bank next week could announce a steeper-than-expected rate cut to boost Europe’s economy.
The EU has an unusual opportunity to forgo protectionism and become the chief global champion of free trade. If it intends to do so, it has not begun well. The bloc means to erect barriers to stop global overproduction from washing up on its shores as America’s market closes; Ms von der Leyen said as much to Li Qiang, China’s prime minister, in a call on April 8th. The EU is not discussing seizing this moment of crisis to lower its pointlessly high tariffs on agricultural imports. Nor is it moving to apply to the 12-member CPTPP, a Pacific trading zone that excludes China. Its only notable progress has been on the deal reached in December between the EU and Mercosur, a South American trading bloc. Austria, which previously opposed the deal, has now come around; France, the main opponent, is reconsidering.
Another rule of the trade-fight club is that fights go on for as long as they have to. With the global order and Europe’s security at stake, this trade war is about more than tariffs. So are Europe’s goals. “What does it take for Republicans to abandon Trump, or the party to lose both houses badly in the midterms?” asks one Brussels wonk. “And is that worth a recession in Europe? The answer is probably yes.” ■
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