President Trump’s trade tariffs have shaken up the world economy. But they are not just taxes on imports – they are a weapon he is using to reshape global economic relations. Tariffs are like a Swiss army knife for Trump, for very different purposes and situations. They are not so much trade tariffs as negotiating tariffs.
The recent imposition of tariffs on goods from Canada, Mexico and China is not only the first blow, but also a signal that Europe may soon find itself at the centre of a trade war. Trump has not yet imposed tariffs on the European Union. Not yet. But he has already said ominously that the European Union has treated America “terribly” and called the trade deal with the bloc “scary”. Given the president’s temperament, there is no point trying to predict what he will do. But tariffs are surely coming. In the coming weeks, if not in the coming days.
How to react to Trump’s tariffs? It would be worth recalling what happened between the EU and the UK after the Brexit referendum. The EU thought it could put pressure on the UK to either withdraw from Brexit or accept a bad deal. The EU, as a bigger power, believed it had a stronger position – and the media agreed.
But the EU had a large trade surplus with the UK, and therefore more to lose from a trade war. And so it went. The biggest single casualty of Brexit was not the UK economy but German industry.
Europe’s reaction to Trump’s tariff threat is, unfortunately, currently following a well-established pattern: underestimation, hope and, ultimately, indignation. Just as with Brexit, Europe now seems to believe it can change Trump’s mind. But this is a mistaken approach. Trump’s tariffs are inevitable; Europe must change its strategy to avoid falling into the same trap that Germany and other export-dependent countries found themselves in after Brexit.
Why is Europe losing the trade war?
The EU has a significant trade surplus with the US – around $209 billion in 2023 and a projected $230 billion in 2024. By the way, Estonia also has a positive trade balance with the US of $217 million in 2023. This implies that the EU is more economically vulnerable than the US, as its economic model is highly dependent on exports. Germany, which is particularly dependent on exports to the US, has already experienced a weakening of its industrial sector due to a series of supply shocks – starting with the effects of Brexit and ending with the pandemic and the Russian war in Ukraine. If the US imposes higher tariffs on EU exports, the impact on Germany and the EU economy as a whole will be significantly negative.
Instead of preparing a strategic response, the EU is instead focusing on Trump’s change of heart. This is how Germany’s opposition leader and expected future Chancellor Friedrich Merz hopes to negotiate a trade deal with Trump. For her part, EU Commission President Ursula von der Leyen is trying to reassure the American president by promising to buy more US gas and arms. Such an approach is unlikely to work. In Trump’s first term, Europeans promised to increase NATO defence spending but failed to deliver.At the time, Europeans were convinced that Trump was a passing phase, a fluke caused by a one-sided electoral system. If now, emboldened by the successful defiance of Trump then, it is concluded that it can be repeated, it may be wrong. Why should Trump take Europe’s political promises seriously this time, especially if we believe that he has learned from his past experience?
The worst possible answer: a trade war.
If the EU responds to Trump’s tariffs with similar measures, it will lose far more than it gains. The overarching lesson of past trade wars is that if a country, no matter how big, has a trade surplus, it should not be at war.
But that is what is happening. After Trump imposed a 25% tariff on Canadian and Mexican goods and a 10% tariff on China, all three threatened retaliatory measures of their own. But such a reaction could be disastrous. The Canadian, Mexican and Chinese economies are already vulnerable and retaliation could hurt them more than the US. The Trump administration is ready to double tariffs if the confrontation deepens.
Europe is no exception. The Commission has drawn up a list of possible retaliatory sanctions on US goods. Several European leaders and the Commission President have declared that US tariffs will be decisively retaliated against. Trade disputes between the US and the EU are not a new phenomenon in themselves. Protectionist trade policies have been pursued by both sides. The most recent dispute, the US tariffs on steel and aluminium imposed on the EU in 2018 and the subsequent EU countervailing duties on selected US goods such as Harley Davidson motorcycles and whiskey drinks, were temporarily suspended, with a deadline for their suspension coming soon – the end of March. So there’s already a lot to deal with.
Europe’s main problem is not Trump’s policies, but that it has for too long depended on exports and underestimated the need for economic restructuring. The reasons lie in economic imbalances. A country’s balance of payments, which consists of trade in goods, is a mirror image of its financial account, which measures the difference between savings and investment. The strength of the German and Chinese economies should therefore be seen in terms of the latter, not in terms of trade. It shows what is going on under the bonnet, namely that they do not know how to spend their savings. Germany and China are the countries with the largest trade surpluses in the world, and they will not voluntarily reduce their surpluses unless forced to. This reflects a deeper problem – they do not know how to invest their savings wisely.
The right response to Trump’s tariffs: reducing dependency and imbalances
Instead of starting a trade war, Europe should focus on solving its own economic problems. For too long, Europe has lacked a strategy to boost domestic consumption and investment.
The best way to respond to Trump’s tariffs would be to deregulate the economy, especially the tech sector, cut corporate taxes, encourage investment in new businesses and attract the best talent from abroad. Europe is too reliant on US technology, while its own tech companies are overshadowed by regulation and red tape. Rather than trying to hold on to old models, Europe should create the conditions in which companies want to invest more at home.
Conclusion: Europe needs to change its mindset
Trump’s tariffs are coming and Europe must be ready. A reaction based on protectionism and countervailing duties will not bring benefits but will further damage the European economy. Instead, the EU should address its economic imbalances, deregulate the economy and encourage domestic investment.
Trump’s policies may seem aggressive and unpredictable, but that is partly Europe’s own fault. For too long, the EU has ignored the need to change the economic model and still expects US leaders to heed its wishes. This is not happening. If Europe does not change, it will be forced to accept the conditions imposed by Trump.
If the EU continues to pursue the same policies it has pursued so far, it will face the same fate that befell German industry after Brexit – a prolonged recession and increased dependency. There is still a chance for Europe to change the situation, but it will require a major change of mindset. The question is whether it is ready.