“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 trade and 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.
What the EU will say in response to Donald Trump’s tariff rampage is still being negotiated. It is far from the hardest-hit victim of the tariffs that America has implemented as of April 9th: the EU’s rate is now set at 20%, far below China’s 104% or Vietnam’s 46%. The instinct of many in Europe is to hit back in kind. But crashing global stockmarkets (see chart), and China’s own swingeing counter-tariffs (on April 9th it announced another increase, to 84%), may have given Mr Trump enough pushback already. The EU, as America’s biggest trading partner, has chosen to take a few weeks to craft a more measured and targeted response.
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 economic damage. “It’s a matter of reassigning resources and markets,” says Alvaro Muñoz, the chief executive of AMFRESH, a big Spanish producer of fresh produce. The EU’s rule-loving bureaucracy is now an asset, promising a reassuring measure of stability. With investors afraid that a global trade war could cause a recession, steep European counter-tariffs would only compound the damage. Instead, European governments could counteract American tariffs’ drag on their economies by spending more. The European Central Bank, too, could cut interest rates faster.
The messaging from leaders so far is broadly consistent. “Nothing can be ruled out, all instruments are on the table,” said Emmanuel Macron, the French president, immediately after the tariff announcement. “The EU will react with proportionality, unity and the strength that comes from being the largest trading bloc in the world,” seconded Pedro Sánchez, Spain’s prime minister. Giorgia Meloni, Italy’s prime minister, is preparing a visit to the White House to negotiate on Europe’s behalf, with a collective message.
In a way, Mr Trump missed an 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 have pitted them against each other (see chart). His talk of annexing Greenland, meanwhile, has led even the usually cantankerous Hungarians to back the common European line.
But maintaining unity may prove tricky. Mr Macron hosted big industrialists and exporters at the Elysée Palace 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 collective response. Politicians unwilling to let a good crisis go to waste are keen on hitting American tech firms; Ireland, which hosts many American tech companies’ European headquarters, was predictably horrified. France and Italy have their own sore spots: they successfully pleaded to exempt whiskey from EU retaliatory measures for America’s earlier steel tariffs, after Mr Trump threatened that targeting the liquor would result in a 200% tariff on European wine.
How decisions are made will matter. Under EU treaty law, tariffs are a matter for the commission to set on its own. But for heavier countermeasures such as restricting market access, a qualified majority of the governments of the member states is needed. And some parts of the trade-defence arsenal remain firmly in national hands. Raising taxes on American tech giants is something national governments can do. For example; corporate taxation is beyond the commission’s remit.
Ms von der Leyen has already repeated an old offer from the EU to eliminate tariffs on all industrial goods between the bloc and America; Mr Trump agreed to work towards such a zero-tariff deal in 2018, after a trade spat during his first term. This time he rejected the bid immediately, demanding the EU buy $350bn worth of fossil fuels (roughly its total annual energy imports) to get into his good graces.
Europe’s response will probably combine three things. First, it will show strength. Robert Habeck, Germany’s outgoing vice-chancellor, said the EU should consider using its fiercest tool: the anti-coercion instrument (ACI). The ACI allows the EU to use a broad range of measures beyond tariffs to hit back at countries that exert economic pressure on its member states. These could include blocking the export of products Americans will find hard to replace, or excluding some American companies from the European market. Mr Trump’s tariff aggression is a textbook case. The ACI requires weeks or months to go from an investigation to a final decision, which is well suited to bringing Mr Trump to the table. It is a tool commensurate with the EU’s size and power. But European leaders still shrink from using it.
The second element is a steady ratcheting-up of tariff threats as a way of pushing 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. On April 7th it presented its list of tariffs to counter those on metal products; those will become official after a vote on April 9th. These 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. The next step might be retaliation for auto tariffs; responses to Mr Trump’s broader tariffs will presumably come last.
The third part of the probable response is support for affected European businesses. Mr Sánchez met business leaders immediately after Mr Trump’s tariff announcement and presented a €14bn plan, including €5bn in credit guarantees to firms with liquidity problems due to lost orders. (The Spanish leader spoke in front of a billboard reading “Our values are not for sale, our [wines] are”.) The tariff war has prompted a rare outbreak of bipartisanship in Spain’s normally polarised politics. Other countries are sure to offer relief to their own firms. For its part, the European Central Bank at its meeting next week could announce an unexpectedly steep rate cut to lighten the grim mood.
The EU now has an unusual opportunity to forego protectionism and become the chief global champion of free trade. Unfortunately, it will probably not seize it. Instead Europe wants to erect barriers to stop global overproduction from washing up on its shores as America’s market closes. Ms von der Leyen made this clear in a call on April 8th with Li Qiang, China’s prime minister. This would be the perfect moment to lower Europe’s absurd tariffs on agricultural imports, but that is not being discussed. Many officials say they want more trade agreements; France is taking another look at the deal reached in December between the EU and Mercosur, a South American trading bloc, which it had refused to sign. But the bloc has yet to consider bolder moves, such as applying to join the 12-member CPTPP, the Asia-oriented trade agreement that succeeded the Trans-Pacific Partnership after America dropped out during Mr Trump’s first term.
Another rule of 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 undoubtedly 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.” ■
