EU Anguish About the US Trade Deal Is Misplaced

Trump’s tariffs will fail in his objective of transforming trade, particularly if others remain open and resist retaliation. In this context the EU’s deal is fine in the short-term but should bring renewed thinking about modern trade policy.

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What we have learnt from this Trump administration is that he really wants tariffs. His next priorities are inward investment and improved market access for US goods. He cares far less about changing the regulations of other countries than most previous US Presidents.

Showing that he can do deals to the supposed benefit of the country is a priority but lower than the straight numbers on import duties or investment pledges. Extra revenues are also welcome. Normal US political rules about Congressional consent are as irrelevant to the President as the WTO.

This position has emerged since inauguration, probably for the President, certainly to his Cabinet who often seem to be negotiating without knowing what the boss actually wants. Announcing so-called reciprocal tariffs in April showed his tariff fixation, but the crudeness of the exercise based on a laughable formula and high rates saw the markets face him down.

Arguably the revised intent became clear in May when the US reached a deal with the UK, which gave a low additional tariff in return for some modest non-WTO compatible market access for Presidential bragging, plus various issues that might become part of a future deal.

Ignoring self-serving claims otherwise, reasonable interpretation of the UK-US deal is that the President’s modest asks took his own negotiating team as well as that of the UK by surprise. There was full expectation in the UK that it would have to sacrifice the Digital Services Tax, and great surprise that the price for only receiving a 10% tariff was some extra beef and bio-ethanol quota.

Criticism of the UK followed, that it had broken WTO rules, and not negotiated away enough tariffs particularly on steel. Brussels voices were particularly insistent that the bloc would never do such a deal and would be able to negotiate away more or all of Trump’s tariffs such as on cars.

Such has been the arrogance on display across the EU with regard to trade negotiations with this US administration. There has been a presumption that it knew what Trump wanted, had the market power to stop that happening, and thus the US could be forced to accept what the EU thought was the deal he should want.

This would involve no new tariffs, some purchases of energy and agricultural goods, and joint work against China, in other words the exact package from Trump’s first term. Given that the President had already renounced his first term deals with Mexico, Canada, and China, this was a failure to read the room and thus set expectation around the EU.

Brussels had been equipped with new tools in the mean-time, most notably in terms of the anti-coercion instrument. This combined with existing abilities to take specific retaliatory measures for example against steel tariffs were the talk of the town. Unfortunately, in terms of the content there is only a certain amount of US goods imports against which action can be taken before it starts to damage the EU economy. Moving into services was an obvious follow-on, but risked an escalating spiral that could start to threaten the key wiring of the global economic system.

Unsurprisingly therefore it was hard for the EU to find consensus around such a response. For the US, a far less trade intensive economy, Europe is not actually important if it believes it should do everything itself. This is not least without being as surgical in response as China, in threatening key inputs for the US. Even then, we may note, China still faces significant tariffs.

For ultimately, this isn’t really US coercion requiring response, this is a President who wants higher tariffs in the misguided belief that will bring back the economy of the 1950s. One might have thought the EU would have realised that against such pig-headedness there is no logical response, since it was so similar to the entire Brexit farrago of a UK thinking it could impose higher trade barriers with no consequences. Then again, Brussels has seemingly been determined not to learn anything from Brexit but to say it has moved on, something that could have been rather costly in this case.

As it was, once rather belatedly the EU realised the Trump game, it was able to negotiate a better deal than virtually anyone else, with a 15% tariff that was not additional to MFN rates unlike the UK’s 10%, some reduction of nuisance tariffs on its part, and rather unlikely investment promises. As with the UK there are suggestions of further phases of work, as with the UK the hope will be that the main deal holds without these, though there will never be certainty given his mode of operation.

Looking around the world there is no evidence that the EU could have secured a better or indeed WTO compliant deal, with or without working with others. Fortunately, Trump is not a good negotiator, another lesson from the UK deal, easy to get the better of once you work out the basic parameters which include showing respect. However, he is happy to escalate in the case of perceived slights, as per Brazil and South Africa, so the EU could perhaps have got to this point via a spiral of retaliatory measures, but why would that have been better?

Ultimately the first lesson of the whole saga is that a President gone rogue in this way cannot be stopped by trade partners, not least when they are also hanging on as security partners. To retaliate simply against his tariffs would be construed as a fundamental attack on his agenda, and is a sign of strength only in the most one-dimensional form of that word, in which you raise fists at the first sign of trouble without thinking through the consequences.

Far better is to be clear that raising trade barriers in such a generic way is self-damaging, as we saw in the UK and now see in the US, and thus the best retaliation is to maintain openness as much as possible. For the EU, finalising Mercosur and deepening partnerships with Canada, Japan, and the UK, the other members of the G7, would be a far more powerful symbol. Each could also let it be known that they consider any emergency justifying tariffs to be ended by the end of this administration, with the expectation of returning to a baseline of WTO rules. Collaboration with CPTPP countries at least in intent would also be part of such a response.

Underlying this US debate is however a far greater one, that the EU needs to move towards. This is about how to manage today’s form of globalisation, where technology means open markets and multinational companies are the norm, and countries are struggling to understand how to manage impacts. The US is far from the only government that believes the answer is to put up barriers significantly, there are EU member states that agree. Trump’s likely failure to bring back manufacturing in an age of global supply chains should show the limits of that approach.

For those other countries that see openness is here to stay, the question is then both developing the tools appropriate for this new economy, and bringing the conversation up to date. This means rejecting the simplistic demands for retaliation, just as learning should be taken from the failed attempts to weaponise the Brussels Effect in the form of regulations such as deforestation, which seem to have similarly imposed more burdens on EU business than anyone else. This is a time of new challenges for the trade policy world, one that needs new answers beyond tariffs and retaliation, or even existing WTO rules.