Europe cannot afford a tariff war with the US

It will hit back immediately. It will target the industries that will hurt the most. And it won’t be bullied or pushed around. We can expect to hear lots of tough rhetoric from European leaders today as the bloc prepares to retaliate against Donald Trump’s threat of tariffs of 10 percent or more on European exports to the United States. There is just one problem, however. It can talk as tough as it wants to — but it is still going to lose. 

With 25 percent levies already in place on Canada and Mexico, and 10 percent on China, steep tariffs on Europe now look inevitable. The EU is “a strong economic area and has its own courses of action,” according to the German chancellor Olaf Scholz, while France’s industry minister Marc Ferracci demanded a “biting” response. During the first Trump presidency, Europe targeted specific American industries such as bourbon and motorbikes. We can expect something similar this time around. 

True, the EU has to do something. The bloc prides itself on being a trade and regulatory superpower. Indeed, as the Brexit debate made clear, one of the main reasons for its existence is that it can’t be pushed around. If that is no longer true, members might start to wonder what the point of it is. 

Even so, it is still going to lose this fight. First, the EU runs a huge surplus with the US, worth $160 billion a year, so it has far more to lose. In a trade war, it will sustain far higher losses for a lot longer than its opponent on the other side of the Atlantic. Next, it has enfeebled its economy with punishingly high taxes and burdensome regulations. The Eurozone is already stagnant this year, and may already be in a recession. Exports to the US were one of the few bright spots, and it can’t afford to lose that market, nor can it take a temporary hit to growth in the same way the US can. Finally, it will be internally divided. It won’t be long before Volkswagen and Siemens are announcing new factories to shift production to the US, while the Poles and the Hungarians will be hustling side deals with Trump. The unity won’t last more than a few weeks. 

In reality, Trump’s tariffs on Canada and Mexico are completely senseless, but he has a point about Europe. The trading relationship is very one sided, with the EU protecting its market while America is completely open to European companies. It would be better to concede that and negotiate a deal. Instead, the EU is setting itself up for a fight that it is only going to lose.