How Europe could try to stop — or get around — damaging Trump tariffs

Donald Trump's U.S. election win has left Europe scrabbling to work out how it will be able to contain or counter highly probable tariffs on its exports to the U.S. once the president-elect enters the White House.

Ahead of his decisive election win last week, Trump had already threatened to revive a trade war that began during his first term in office, stating in his election campaign that he would raise tariffs on Chinese goods by 60-100%, and would impose a blanket 10% to 20% tariff on all U.S. imports.

Trump sees the protectionist move as a way to boost U.S. jobs and growth, but the policy would undoubtedly open up a new front in trade tensions with two of the country's largest trading partners, the EU and China. Critics of the proposed tariffs say the policy could lead to higher prices for U.S. consumers.

While Trump has a reputation for unpredictability, meaning his rhetoric sometimes fails to materialize in terms of policy, analysts agree that the president-elect appears undeterred when it comes to trade tariffs, having opined on how the term itself is "the most beautiful word in the dictionary."

That leaves Asia and Europe having to quickly consider ways to mitigate the future impact of export tariffs, and whether to retaliate or to try to negotiate a get-out deal. Economists caution that it's uncertain whether Trump's tariffs on Europe will be "as damaging as feared," as ING economists stated in a note last Friday, or whether they will simply be "a bargaining chip designed to unlock wider foreign policy deals."

Nonetheless, there have been calls in Europe for the bloc to prepare retaliatory measures now, with the director of Germany's Ifo Center for International Economics calling on Germany — which relies heavily on trade with the U.S., particularly in terms of vehicle exports — and the EU to "strengthen their position through measures of their own."

"These include deeper integration of the EU services market and credible retaliatory measures against the U.S.," Ifo's Lisandra Flach said last week. The proposed measures include the potential use of the EU's new "Anti-Coercion Instrument" that gives the gives the region a wide range of possible countermeasures when, it says, "a country refuses to remove the coercion."

The countermeasures include the imposition of tariffs, restrictions on trade in services and trade-related aspects of intellectual property rights, and restrictions on access to foreign direct investment and public procurement. Germany and the EU could also strengthen cooperation with individual U.S. states, Flach suggested.

But economists also say that the EU could try to use the carrot instead of the stick with the U.S., suggesting there are three other ways Europe might try to stop, limit or avoid Trump's likely tariff policy altogether.

As a starting position with the incoming Republican administration, European policymakers could aim to avoid tariffs altogether, economists note, by offering to boost select American imports in exchange for the U.S. giving it an exemption from tariffs.

"This may include LNG [liquefied natural gas] and soybeans, both of which were part of a deal between Donald Trump and then-president of the [European Commission] Jean-Claude Juncker in July 2018," Andrew Kenningham, chief Europe economist at Capital Economics, said in a note last Friday.

Analysts at Eurasia Group, led by Mujtaba Rahman, commented that a "transactional strategy" was likely to be pursued first by the European Commission's President Ursula von der Leyen. This would see the EU be guided by the goal of bolstering U.S. exports in key sectors such as agriculture, energy (LNG), and defense.

"The EU is likely to pledge to further expand LNG imports from the U.S. Von der Leyen may also explore closing two deals the commission had been negotiating with President Joe Biden, on the Global Arrangement for Sustainable Steel and Aluminium and an EU-US Critical Minerals Agreement. An attempt is also likely to do more via the EU-US Trade and Technology Council, which has helped foster some collaboration on digital issues, such as AI and export controls," the analysts at Eurasia Group noted.

Alternatively, Kenningham said the two sides could strike "a broader geopolitical deal to try to head off the tariff threat." 

"The EU could, for example, make a commitment to purchase more defence equipment from the U.S. in order to continue supporting Ukraine — although the EU would find it difficult to agree on how to raise the funds given the staunch opposition of many, including Germany, to more joint EU borrowing."

A deal is likely to be favorable to European policymakers as they look to limit the economic hit a 10% U.S. tariff would have on European exports. "The key point is that, while our working assumption is that there is a 10% US tariff which subtracts only 0.2% from euro-zone GDP, the outcome could be less than that if the EU is successful in reaching some kind of deal," Kenningham said.

Whether there Europe can reach consensus on how or whether to do a deal with Trump is debateable, however. Carsten Brzeski, global head of Macro at ING, said in a post-election note last week that "Trump hits Europe not only at a time of economic weakness but also one of political instability."

"During the first Trump term, Emmanuel Macron and Angela Merkel were a strong political axis. Today, France is struggling, and the German government has just collapsed. There's not exactly a strong bulwark," he said. "It really casts doubts about Europe's ability to find adequate responses to Trump," he added.

Another possibility is that Europe could agree to align its policies toward China more closely with those of the U.S., Capital Economics' Kenningham noted.

That could mean further barriers to imports of Chinese electric vehicles and other technology, as well as curbs on inward foreign direct investment from China, and increasing restrictions on exports of high-tech goods such as lithography machines.

Capital Economics' Kenningham conceded that the EU would be "reluctant to cut ties with China too drastically," but said policymakers may be forced to do so if faced with strong U.S. pressure.

Eurasia Group's analysts agreed that the EU's "most difficult policy response will likely be vis-à-vis China, given that Trump's return would make it harder for the EU to chart its third-way 'decoupling' strategy."

"If Trump launches a trade war with China, the EU could benefit in the short term if the U.S.'s focus is exclusively on China and not the EU. Beijing would also be less likely to strongly counteract Brussels's trade measures as it fights Trump, and the EU will likely try to make common cause with Washington in some areas, such as advanced chips," the analysts noted.

"Ultimately, however, Trump is likely to accelerate the EU's structurally toughening stance against China. This would present the greatest challenge to Germany, given the reluctance of Chancellor Olaf Scholz to even fully get on board with the EU's milder de-risking strategy."