Europe’s Renewed Trade Policy Challenge

President Trump’s return to the White House means that trade policy will return to prominence. For one thing we know for certain is that he believes the US has done badly economically from the rest of the world, and that this needs to change.

That the US has been comparatively thriving in a world of slow growth is irrelevant to his world view. Unemployment is low but the nostalgia for the days of factories in evert town is evidently high. This may be ‘trade-blaming’ technology and domestic decision-making, but that has a long history.

By contrast, the Biden administration preferred to subsidise new production facilities and not really talk about trade. What we can also say is that this approach failed comprehensively. There is always some undercurrent of suspicion about imports, in almost every economy, and when the volume is turned up on that it cannot easily be ignored.

Inevitably talk is already turning to the way in which US trading partners will respond to Trump’s proposed 10% or even 20% tariff. There aren’t going to be good answers to that, but we’ll be better prepared if we understand the starting point.

For the UK the figures are stark. This is a trade relationship dominated by services, with the largest category of ‘other business services’ responsible for £58 billion in the four quarters to the end of Q2 2024. By contrast the largest goods sector, of medicines and pharmaceutical products, was only worth around £8 billion.

EU Member States will have different patterns, but the first takeaway is that the entire trade relationship is not at risk from goods tariffs. This is not going to be a return to the world of the 1930s.

Even within that goods trade, a considerable amount of it will be intermediates going into US production of final products. This will apply for example to automotive parts for US cars, or Rolls Royce engines for Boeing planes. While it is impossible to judge the politics at this point, we can assume that there will be considerable lobbying efforts in Washington from US manufacturers concerned that more expensive domestic production will actually increase imports of final goods.

Remember the t-shirt that was produced at the height of Trump’s first Presidency by Scott Lincicome of Cato, that “Tariffs not only impose immense economic costs but also fail to achieve their primary policy aims and foster political dysfunction along the way”? Well, the idea that even the Trump team will be united on their approach seems extremely unlikely, never mind once elected representatives are lobbied by industry in their areas.

This is modern globalisation, a world of international supply chains of goods and services, in which countries do not have the powers that politicians claim to direct their economies. In 2016 the UK voted to leave the EU with the slogan of “Take Back Control” but that has proved not to be possible. Technology was responsible for the loss of factories in the US, and Artificial Intelligence may yet have the same effect on services jobs.

Large companies are operating and trading globally, negotiating their way around government regulations and trade policies. They work with suppliers over long time periods, but will also make changes to sourcing based on tariffs where they can.

Respectable politicians have largely not dared to talk about modern economic realities. This has left open the way to populists to promise the earth and not worry too much about whether this is credible.

This then should be the first job for European politicians in response to Trump’s election, to discuss the global economy as it really exists. One in which our economic security and prosperity has been built on trade, but which has involved painful adjustments on the way. Therefore, also where this will not always be smooth in the future.

Behind the scenes there is no doubt that European officials will have been analysing economic dependencies on the US in terms of exports. This will have been with at least one eye on potential retaliatory measures, which may have a place. In other cases though US tariffs will simply impose a short term cost on their own consumers.

Information in general should be at the heart of any realistic concept of economic security. Dependencies whether for imports or exports are dangerous, and knowing about these is important. This is of course wholly different to the idea that resilience depends on national production, which is on the surface appealing but doesn’t actually work and needs to be firmly rebuffed. Governments simply cannot have this level of control in the modern economy.

This is already a tougher world than that of 20 years ago, but Europe’s prosperity depends on not retreating from the challenge. China’s growth and that of other Asian economies has been of benefit to our own, but does also mean adjustments and concerns. We need politicians who understand and deal with both sides of that equation. Openness should be a given, but as it has always been, tempered with political reality.

That means for example that Green Deal measures should proceed, proportionately, but trade deals and partnerships are also needed. That the regulatory burden on EU companies must however be closely monitored, because they need to be competitive with others across the world. One lesson from Trump round one was that ultimately he did want deals to sell more US agriculture around the world. In some ways he was less isolationist than President Biden who made no trade deals.

Where Europe can do deals with the US of mutual benefit, we should. If that isn’t possible we shouldn’t panic. When it comes to the WTO we know there isn’t agreement, and should assume the need to maintain trade rules as well as possible in US absence. Though the prospects of going further or any sort of WTO reform are slim. Similarly we can talk of cooperation over China, but the chances are that EU and US positions are too far apart as they have been for some years. Europe ultimately needs to be able to compete, not retreat, from the Asia challenge.

None of this will be easy, trade policy was never supposed to be straightforward anyway, although we may have become complacent at times. There are multiple inter-dependencies and shifting plates, and no obviously ideal outcomes. Government actions given they can’t direct economies are always going to feel slightly inadequate in being about enabling others. That said, informally there has been a lot of agreement across Europe on this mixed approach, and what is now needed is to solidify this and seek to work collaboratively with each other and with companies in what will be a challenging environment.

Political leadership is required. That too will probably fall short of the ideal, but as long as Europe has a rough sense of direction and economic reality, we can avoid the worst impacts of an economically damaging US trade policy.