Europe could attempt to mitigate or bypass harmful Trump tariffs.

• The U.S. election win of Donald Trump has left Europe struggling to determine how to handle potential tariffs on its exports to the U.S.
• Before his recent election victory, Trump had already hinted at rekindling a trade conflict that originated during his initial presidency.
• During his election campaign, Trump declared that he would increase tariffs on Chinese goods by 60-100%, and impose a 10-20% tariff on all U.S. imports.

The election of Donald Trump as the US president has left Europe struggling to determine how to handle potential tariffs on its exports to the US.

Before winning the election last week, Trump had already threatened to restart a trade war that started during his first term, stating in his campaign that he would increase tariffs on Chinese goods by 60-100%, and impose a 10-20% tariff on all U.S. imports.

Trump views the protectionist measure as a means to increase U.S. employment and economic expansion. However, the policy may spark a new trade conflict with the EU and China, two of the country's largest trading partners. Opponents of the proposed tariffs argue that the policy could result in higher prices for American consumers.

Trump is known for being unpredictable in his rhetoric, but analysts believe that he remains firm on his stance regarding trade tariffs, having described the term as "the most beautiful word in the dictionary."

Asia and Europe must now urgently devise strategies to minimize the consequences of export tariffs and decide whether to retaliate or negotiate a way out. However, economists warn that it is unclear whether Trump's tariffs on Europe will be as harmful as predicted, as ING economists noted in a report last week, or whether they will merely serve as a bargaining chip to achieve broader foreign policy objectives.

In Europe, there have been demands for the bloc to take action against the U.S. by implementing countermeasures. The director of Germany's Ifo Center for International Economics urged Germany, which heavily depends on trade with the U.S., particularly in the automotive industry, and the EU to strengthen their position through independent actions.

"Ifo's Lisandra Flach stated last week that the proposed measures include the potential use of the EU's new "Anti-Coercion Instrument," which provides the region with a range of countermeasures when a country refuses to remove coercion."

To combat the trade deficit with the United States, Germany and the EU could impose tariffs, limit trade in services and intellectual property rights, restrict foreign direct investment and public procurement, and strengthen cooperation with individual U.S. states, as suggested by Flach.

Economists suggest that the EU could use a carrot instead of a stick with the U.S. to stop, limit, or avoid Trump's likely tariff policy altogether.

Concessions

European policymakers could aim to avoid tariffs by offering to boost select American imports in exchange for the U.S. granting them an exemption from tariffs, economists suggest.

According to Andrew Kenningham, chief Europe economist at Capital Economics, the deal between Donald Trump and Jean-Claude Juncker in July 2018 may have included LNG and soybeans.

The European Commission's President Ursula von der Leyen is likely to pursue a "transactional strategy," with the goal of increasing U.S. exports in key sectors such as agriculture, energy (LNG), and defense, according to analysts at Eurasia Group, led by Mujtaba Rahman.

The EU is likely to increase LNG imports from the U.S. and explore closing two deals with President Biden on sustainable steel and aluminum, as well as a critical minerals agreement. The EU-US Trade and Technology Council may also collaborate on digital issues such as AI and export controls, according to analysts at Eurasia Group.

A geopolitical deal

Kenningham suggested that the two sides could reach a broader geopolitical agreement to prevent the imposition of tariffs.

"The EU could pledge to buy more defense gear from the U.S. to aid Ukraine, but it may struggle to secure the necessary funds due to opposition from many, including Germany, to joint EU borrowing."

European policymakers may benefit from a favorable deal as they strive to mitigate the economic impact of a 10% US tariff on European exports. According to Kenningham, while their initial assumption is that a 10% US tariff would reduce euro-zone GDP by only 0.2%, the outcome could be less than that if the EU can negotiate a deal.

Whether Europe can agree on a deal with Trump is uncertain, as Carsten Brzeski, ING's global head of Macro, noted in a post-election note last week, stating that Trump's actions are hitting Europe at a time of economic weakness and political instability.

"During the first Trump term, Macron and Merkel formed a strong political alliance. However, France is currently facing challenges, and Germany's government has recently collapsed. This has raised concerns about Europe's ability to effectively respond to Trump's policies," he stated.

An alliance against China?

Capital Economics' Kenningham suggested that Europe could align its policies toward China more closely with those of the U.S.

The restrictions on imports of Chinese electric vehicles and other technology, as well as inward foreign direct investment from China, and increasing limitations on exports of high-tech goods such as lithography machines could create additional obstacles.

If faced with strong U.S. pressure, policymakers may be forced to cut ties with China too drastically, even though the EU would be reluctant to do so.

The EU's "most challenging policy response will likely be towards China, as Trump's return may hinder the EU's ability to implement its 'decoupling' strategy."

The EU could gain an advantage in the short term if Trump's focus is solely on China and not the EU during a trade war. Beijing would be less likely to strongly retaliate against the EU's trade measures as it battles Trump, and the EU may attempt to align with the U.S. on certain issues, such as advanced chips.

"Despite his efforts, Trump may ultimately push the EU to adopt a more stringent stance against China, which would pose the greatest challenge to Germany due to Chancellor Scholz's reluctance to fully embrace the EU's softer de-risking approach."