May 13, 2024

On Trade, a Return of Trump Would Spell Trouble for EU

If Donald Trump wins the US presidential election in November, Europeans should once again brace for major transatlantic tensions on trade. An EU policy of strength would be the right response.

US President Donald Trump attends a bilateral meeting with European Commission President Ursula von der Leyen during the 50th World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 21, 2020.
All rights reserved

Under former President Donald Trump, the United States pursued an aggressive, unilateral trade policy between 2017 and 2021 that was characterized by protectionist threats and measures, was based on the exploitation of bilateral economic and security dependencies and was mostly aimed at gaining trade concessions. At the global level, it terminated negotiations to establish a Trans-Pacific Partnership and effectively suspended the dispute settlement procedure of the World Trade Organization (WTO). These measures were intended not only to reduce curbs on America's trade policy power but also to protect US industry. The Trump administration introduced punitive tariffs on imports of goods including washing machines, solar panels, steel, and aluminum.

Threats led to the partial reform of the US free trade agreements with Korea (KORUS), Canada and Mexico (NAFTA, later USMCA) as well as the conclusion of a “mini-trade agreement” with Japan (USJTA). The Trump administration also sparked a trade conflict with China, forcing Beijing to make economic and trade policy concessions. Similarly, the threat of US punitive tariffs on European car imports prompted the EU to agree to negotiations on a possible bilateral trade agreement. In addition, the Trump administration tightened its export control policy, especially towards China. However, that was mainly linked to national security interests.

Political incentives to pursue a protectionist trade policy and adhere to a protectionist narrative remain significant. A free trade policy lacks sufficient domestic political support. Although opinion polls by the Chicago Council on Global Affairs suggest that a majority of Americans regards free trade as economically beneficial, they also support protectionist measures as long as they are seen as safeguarding American jobs—however intellectually contradictory such a view may be. Of greater importance is the fact that the outcome of the presidential election will strongly depend on whether the candidates can prevail in swing states. As many of them have experienced significant economic dislocation in recent decades, including de-industrialization, protectionist narratives and policies enjoy broad support in swing states.   

Not surprisingly, consensus for free trade policies has long since evaporated in the United States, which gives both the incumbent, President Joe Biden, and his likely challenger incentives to advocate protectionist measures. In this sense, there are parallels between Trump’s “America First” policy and Biden’s premise of a “Foreign Policy for the Middle Class.”

Of course, one shouldn’t attach too much weight to statements made by presidential candidates given that they are often aimed at mobilizing their party base. The trade policy a US president eventually pursues is also influenced by advisors and the so-called “adults in the room,” technocrats who tend to be more moderate. That said, Trump’s trade policy 1.0 has proven that the executive branch has far-reaching leeway when it comes to protectionist policies. It would therefore be a mistake to dismiss Trump's trade policy statements as mere campaign rhetoric.

Outlines of a Trump Trade Policy

The conceptual outlines of a “Trump 2” trade policy are gradually becoming discernible. A second Trump administration would introduce a “universal baseline tariff” of 10 percent on all imports and a tariff of 60 percent on imports from China. This is reminiscent of former President Richard Nixon’s decision in 1971 to impose an additional 10 percent tariff on America's trading partners to force them to renegotiate international exchange rates.

The details are still unclear, but the basic idea of leveraging America’s trade power to win concessions is largely in line with Trump's previous trade policy. Under a second Trump administration, existing transatlantic trade conflicts (Airbus-Boeing subsidy dispute, steel and aluminum tariffs, and European digital taxes) would also likely intensify.

In addition, Trump’s team appears to be considering an even tougher policy toward China. The planned suspension of the “most favored nation” status for China would allow the US to impose far-reaching protectionist measures on Beijing. In this context, a complete ban on certain Chinese imports such as steel and pharmaceutical products is also being contemplated, to be implemented over a period of four years.

Meanwhile, Trump has been voicing strong criticism of the Biden administration’s Inflation Reduction Act (IRA). The extent to which a second Trump administration would be willing and able to partially or completely repeal the law is uncertain. But it would probably attempt to de facto repeal parts of the IRA through administrative and regulatory measures. Scrapping the law could help to reduce transatlantic tensions and the subsidy dispute linked to it. However, that would be little consolation at best if European goods become subject to a 10 percent tariff.

Trade policy under the first Trump administration showed a tendency to exploit economic and security dependencies to strengthen America’s bargaining position. However, it also showed a certain willingness to withdraw protectionist threats, albeit not in all cases (China), if a trading partner was prepared to make more or less major concessions (KORUS, NAFTA, EU). In some cases, the Trump administration even accepted exceptions without any quid pro quo on trade (for example on the issue of tariffs on Australian steel imports).

The European Union’s export dependency on the US is greater than vice versa. In 2022, EU exports to the US amounted to 2.8 percent of European GDP, while US exports to Europe amounted to only 1.4 percent of US GDP. In theory, this creates an asymmetric interdependence in favor of the US. But in practice, the average tariffs of around 3 percent in bilateral trade are among the lowest in the world, making the potentially high costs of a trade conflict difficult to justify.

Of course, this doesn’t mean that a second Trump administration wouldn’t try to push the EU to make trade policy concessions by threatening higher tariffs, as the first Trump administration did in 2018 when the threat of higher tariffs on European car imports was initially intended to force the EU to open its agricultural market to American exports. 

An EU Trade Policy of Strength 

The European Union should therefore pursue a trade-focused deterrence policy aimed at preventing a second Trump administration from adopting protectionist measures directed against Europe. In anticipation of possible US measures, the EU should signal unequivocally, even before potential Trump’s potential inauguration, that it is prepared to take prompt countermeasures and accept the costs of a trade conflict with the US. Brussels should also make it clear to American policymakers that the EU has newly created trade policy instruments at its disposal, such as the Anti-Coercion Instrument which provides a more effective and credible trade deterrence and defense.

At the same time, such a geo-economic deterrence policy should be accompanied by a willingness to negotiate, not least to give a second Trump administration the opportunity for a face-saving compromise that can be sold domestically as a success. As was the case during the first Trump administration, the EU should focus on offering a further liberalization of transatlantic trade relations in its negotiations with the US. A combination of toughness and flexibility might help to avoid a trade conflict that would be economically costly for both sides.

Could a second Trump administration exploit security dependencies? Donald Trump’s pre-election campaign threat not to defend NATO members that do not meet the 2 percent defense spending target seems to make the exploitation of security dependencies a real possibility. Seoul was threatened with the withdrawal of American troops during the renegotiation of the Korea-US free trade agreement. (Game theorists call this “cheap talk,” as opposed to “costly signaling”). Nevertheless, there are good reasons to doubt whether such a threat to the EU would be truly credible.

Of course, a Trump administration could initially implement smaller steps without immediately withdrawing from the NATO alliance. The provision of further aid to Ukraine could be made conditional on trade concessions, and this could weaken the EU's bargaining position. But trade negotiations last many months and even years so a reduction in security assistance, which could lead to the destabilization of Eastern Europe, would not be particularly well suited to gaining concessions on beef imports, for example.

Such threats would also be widely seen as disproportionate and would lack credibility. And even a President Donald Trump would hesitate to risk the destabilization of Eastern Europe’s security for the sake of lower EU agricultural tariffs. If, on the other hand, a second Trump administration were to categorically rule out further aid for Ukraine and other security support, the associated bargaining potential and negotiating advantage for the US would also disappear.

But even if a second Trump administration were to explicitly link security policy support to trade concessions, an EU trade policy that is both strong and conciliatory would still be the best strategy to counter a more aggressive and unilateral US trade policy. This also applies if the EU were ultimately forced to make greater trade policy concessions than in a scenario in which the United States did not play on Europe’s security policy dependency.

Markus Jaeger is a research fellow at the Center for Geopolitics, Geoeconomics, and Technology of the German Council on Foreign Relations and adjunct professor at Columbia University in New York.

Read more by the author

Markus Jaeger

The Case for an EU-US Economic Security Alliance

Despite much goodwill on both sides, trade and economic relations between the United States and Europe have remained strained. Working together to collectively improve transatlantic geoeconomic security would offer a way forward.