Will Europe Stand Up to U.S. Tariff Threats?

U.S. President Donald Trump’s threat to raise tariffs on the EU to 50 percent—well above the previous “reciprocal” rate of 20 percent—had put the U.S. and the EU on path that either would result in a deal or a dramatic escalation on July 9th.

The decision of the U.S. Court of International Trade, now under appeal, has called into question President Trump’s ability to impose the initially threatened 20 percent “reciprocal” tariff, let alone a 50 percent tariff. The Court indicated that the International Emergency Economic Powers Act (IEEPA) cannot be used to impose broad (and variable) tariffs to counter the trade deficit. But there are a number of other legal avenues that the Trump Administration could use to generate, over time, similar tariffs.

The underlying issue remains, and it is far from resolution.

The U.S. still is believed to want countries to accept a 10 percent “base” tariff and many 25 percent sectoral tariffs—and also make significant additional concessions to rebalance the economic relationship to avoid paying even higher tariffs.

The EU is willing to reduce its tariffs on industrial trade to zero, including its 10 percent auto tariff—but in a context where the U.S. rolls back both new and old tariffs (“zero for zero” implies the U.S. auto tariff of 2.5 percent would be reduced to zero as well). It hasn’t been willing to make significant concessions and also accept (as in foregoing its right to retaliate for unilateral U.S. changes to previously agreed tariffs) the new U.S. tariffs.

The landing zone for an agreement that removes the threat of a full-fledged trade war is thus unclear; the most realistic outcome for July remains a deal that pushes the true deadline back and avoids both the “reciprocal” tariff and European retaliation.

In my new paper for le Grand Continent, available in both English and French, I provide a bit of advice from across the Atlantic to guide the collective European response to President Trump’s unconventional trade—and alliance—policies.

The basis advice is consistent with an enlightened view of U.S. economic and strategic interests as well, as U.S. and EU together are stronger than either is alone.

Recommendations include strengthening Europe’s internal market and internal sources of demand; neither China nor the United States is a reliable export market, but neither is such a big market that it could not be offset by stronger European demand. Europe equally is a big enough market that is has the ability to retaliate in a meaningful way against unwarranted U.S. tariffs, but it should do so thoughtfully, and in ways that signal a desire for an eventual de-escalation and tariff rollback. Part of being thoughtful is recognizing that there is room for Ireland’s inflated surplus with the United States, a surplus driven by the transfer pricing policies of U.S. firms seeking to move profits on U.S. sales to Ireland and other low tax jurisdiction, to fall without really impacting the broader European economy.

Finally, Europe should demonstrate to President Trump—and to itself—that it has plenty of geopolitical cards to play. Ukraine may not fall into Trump’s conception of the United States’ natural sphere of influence, but Europe has enough financial, economic, military and diplomatic resources to prevent Ukraine from falling to Russia.

There are many more details in the essay. It is available here.