THE COUNTRIES of the European Union are divided over defence, economic policy, trade, China and much else. This does not make it easy to agree on tactics in the face of an American president who appears to be willing to use any lever of American power to get his way. On January 31st Donald Trump said he would “absolutely” impose tariffs on the EU, complaining that “They don’t take our cars, they don’t take our farm products, essentially, they don’t take almost anything.” He followed that up, on February 2nd, by calling the EU’s actions on trade “an atrocity”. On the market opening the following morning, the euro lost 1% against the dollar. European stocks fell by more.

But if Mr Trump hits Europe with hefty tariffs, as he has announced for Canada, Mexico and China (though Mexico’s have now been paused for a month), the EU will aim to find common ground and respond with a mix of playing tough, giving in and embracing a degree of drama.

In a normal trade spat, the EU would simply respond with retaliatory tariffs, with the confidence born of being one of the three major markets in the world. The fight with Mr Trump in 2018 is an example, when he invoked national-security concerns to impose tariffs on steel and aluminium. The EU responded in kind. (Canada has just done something similar in retaliation to Mr Trump.) Since then, the EU has beefed up its trade-defence arsenal to suit a more confrontational age, including an anti-coercion instrument which allows for swift tariff retaliation should third countries try to put economic pressure on a single member state.

The European Commission, which runs trade policy for the EU, has retaliation plans ready to be put into effect but it is keeping them firmly under wraps. However, observers expect them to broadly follow those used in 2018, when the EU targeted sectors that are prominent in states that matter to Mr Trump and his Republican party at the voting booth. The phased introduction and automatic ratcheting up of tariffs used then may also be replicated this time, to force the pace on negotiations with the Trump administration. Member states will do their best to let the commission do the hard work, to make sure that it is the EU that takes the blame, not national governments.

But there are problems. An across-the-board tariff of 10-20%, as Mr Trump has previously said he favours, would probably require a response that would fall outside of the anti-coercion instrument, and require the EU to go through lengthy World Trade Organisation processes or adopt unprecedented ad-hoc legislation, argues David Kleimann of ODI Europe, a think-tank.

Another problem is that retaliation may provoke further escalation. Ngozi Okonjo-Iweala, the WTO’s director-general, recently implored WTO members to consider avenues other than tariff retaliation.

The EU will hope that negotiations at least make Mr Trump’s tariffs short-lived. There are three main ways in which the EU will try to satisfy Mr Trump. The first is to buy more energy and weapons from America, goods salient enough that Mr Trump can claim victory. Ursula von der Leyen (pictured), the president of the European Commission, has suggested that Europe could buy much more liquified natural gas (LNG) from America. Toughening energy sanctions on Russia, from which Europe still buys a disturbingly high amount of LNG, could be thrown into the mix. Spending more on defence, another of Mr Trump’s demands, could be combined with a commitment to buy more American kit (for instance for Ukraine) to achieve goodwill on tariffs.

The second area involves China. European businesses are increasingly under threat from Chinese competition, even though that gives European consumers access to cheaper goods. If America closes or restricts its market to Chinese exporters, the EU is likely to be flooded as goods are diverted. That alone makes the EU more open to imposing its own trade measures against China, even if they would take a different form than Mr Trump’s 10% tariffs. “The overall message is: we have common interests, on defence, Ukraine and China, and we are willing to do more, but that will be harder if you hit us with tariffs,” says Mujtaba Rahman of Eurasia Group, a consultancy.

The EU might also try its hand at a macroeconomic argument. The big trade surpluses that some EU states have with America are a known obsession of Mr Trump (see chart). The Economist has corrected German and Dutch figures to account for the Rotterdam effect—the Dutch port being a major transit hub for German goods, some of which gets counted as Dutch trade. Even then, Germany’s surplus stands out. One idea is that the EU could strike a deal with the Trump administration that mandates its member states to work towards reducing their overall trade surpluses through more domestic demand, even if it will not necessarily do much to help with the bilateral trade surplus with America, which could widen for other reasons. “We have seen that Mr Trump is keen on making deals, and less bothered by them not working,” says Sander Tordoir of the Centre for European Reform, another think-tank.

That leaves the EU with a script to follow. Mr Trump has made clear that the EU, which in his imagination “is way out of line”, is next in line for tariffs. And some fireworks will be needed, on both sides. Mr Trump will need to show that he brought Europe to heel on defence and China. European policymakers for their part need a bit of drama to force them to close ranks and push through difficult decisions, such as more spending on defence and boosting domestic demand. Nothing sparks the EU into action quite like an external threat.■

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