Trump’s Trade Threats May Have a Silver Lining for Europe

Among the many countries targeted by U.S. President-elect Donald Trump’s tariff threats—a net that he recently widened to include all the BRICS countries if they so much as think of abandoning the dollar—those in Europe face some of the scariest scenarios in the short term.

Unlike China, also one of Trump’s trade targets, Europe isn’t politically monolithic, and its fragmentation advances by the day—which could hamper any unified response to Trump’s next trade war. Unlike China, Europe is not a potentially bottomless pit of purchases of U.S. goods, such as natural gas and soybeans, that might mollify the White House. Unlike China, Europe does not have a ready arsenal of critical and strategic ripostes, from all the -alliums to the antimony, to put pressure back on Washington.

But Trump’s renewed trade war might just have a silver lining for the world’s biggest economic bloc. 

For a quarter of a century, the European Union has been struggling to make its own union more complete, if not perfect, and extend its trade tendrils further. It has a massive to-do list when it comes to closing the productivity gap and overcoming its strategic and economic vulnerabilities, such as those exhaustively outlined by former Italian Prime Minister and European Central Bank President Mario Draghi. 

As much as Trump and President Joe Biden did for China with their economic warfare, the latest round of trade fights with Europe may finally prod the old continent into realizing a new economic blueprint and finally ensuring its resilience, self-reliance, and something like economic sovereignty.

“The silver lining—making real the recommendations of the Draghi report—would be the best outcome of this situation, but it won’t be done overnight, and will require a lot of political cohesion and willingness from EU member states to pull together,” said Alberto Rizzi, an expert on trade and geoeconomics at the European Council on Foreign Relations.

What the EU’s 27 member states are bracing for is the threat of additional U.S. tariffs between 10 and 20 percent on all exports from the bloc—or maybe just some of them, in some sectors, from some countries. The full scope of Trump’s trade plans remain unclear, especially since his first-term trade guru, former U.S. Trade Representative Robert Lighthizer, has been frozen out of the new administration. Not to be outdone, on Dec. 4, Trump nominated Peter Navarro, the only man alive who knows less than the president-elect about trade, to be the “senior counselor for trade and manufacturing.” But economists working out their grim scenarios expect pain for big exporters such as Germany, France, and the Netherlands. 

So how can Europe parry, respond, or preempt Trump’s promised trade war? This is something that bedevils not just Eurocrats but also economists; Oxford Economics, a research outfit, noted that a full Trump tariff package could reduce world trade by 10 percent and shrink U.S. and world GDP by 1 percent. 

The first instinct is always to buy off Trump with vague promises of more purchases of U.S. goods, especially natural gas. That was exactly the strategy former European Commission President Jean-Claude Juncker pursued the first time Brussels had to go through this, and its current president, Ursula von der Leyen, has entered stage right with the same script, vowing to increase purchases of U.S. gas.

There are a couple problems with this approach. Europe doesn’t have quite the appetite for U.S. raw materials as China does, for starters, and that goes double for natural gas, despite Europe’s desire to end its reliance on Russian molecules. (Also, not to get technical: European energy companies, unlike most Chinese firms, make their decisions based on market considerations, not on European Commission soundbites.)

The other go-to purchase to placate Trump—U.S. agricultural goods—is problematic for Europe, which has long-standing phytosanitary regulations in place to protect both European cuisine and well-funded European farm lobbies. A slight increase in agricultural imports to Europe from less-regulated regions such as North Africa unleashed an armada of angry tractors in Europe already this year, and fears of the great unwashed fruit helped hold up a long-awaited trade deal with the Southern Cone—hormone-ridden beef and chlorinated chicken flooding Carrefour is the one thing that could actually unite warring French political factions.

Trump wants to sell more U.S. cars and planes to Europe. Unfortunately for Europe, that’s also a problem: the European auto industry is on life support, and the only thing that would make the French angrier than more U.S. beef would be greater access for Boeing that could undercut the big order backlog of aerospace giant Airbus.

Defense procurement might be a way. The Trump team has explicitly linked greater market openness (read: tariff relief) to greater defense spending, and NATO countries, many of whom are in the EU, have spent years trying to spend their way into Trump’s good graces. Now that France has dropped its buy-European demand for EU defense procurement, there could be a path toward a Saudi Arabian-style solution to placating Trump. If only Europe actually had a formula for financing both more guns and butter (Ireland is actually creating a strategic butter reserve) without blowing up the already-fragile politics of the EU, that might work.

So if honey doesn’t work, what about vinegar? The first time around, the EU retaliated against Trump’s tariffs with targeted tariffs of its own, not on critical inputs but on carefully-selected goods meant to cause maximum political pressure on the White House (the famous Jim Beam and Harley-Davidson drought that beset Europe). 

European officials said that they have checked their lists twice this time and have a full suite of their own tariffs ready to go, as well as less patience before pulling the trigger. The only problem is that those tariffs don’t actually put a lot of pressure on the U.S. economy, and Trump dodged the political blowback last time by simply buying off any sectors caught in the fallout of his trade wars.

Europe does have an anti-coercion instrument designed to fight economic chokeholds. It’s not entirely clear if that means U.S. tariffs or Chinese mischief—and in any event, that novel instrument has neither been used yet nor is it at the top of the list of potential European responses to U.S. threats. Though, one thing Europe could do is take advantage of the tiny bit of leverage it has in critical chemicals and pharmaceutical exports to strike a harder bargain with the United States.

So where does that leave Europe? Looking for new connections. The United States is currently the bloc’s biggest trade partner, with trade skewed toward EU exports going west, but there are, as your mother told you, plenty of other fish in the sea.

The EU, after a decades-long struggle, might finalize a free-trade deal with so-called Mercosur countries of Latin America this week, thanks in no small part to France’s political paralysis, which might prevent Paris from blocking the deal. There are other deals in different stages of negotiations to deepen trade ties with countries such as Mexico, India, and Indonesia. 

Taken together, those economies would almost add up to what the United States is to Europe. There will be political headaches—farm lobbies don’t want competition, Greens aren’t keen on the fossil fuel imports that could address Europe’s energy disadvantage, and half of Europe doesn’t even seem to believe in Europe anyway. It won’t be quick, and it won’t be easy, but it would be a path to move away from reliance on a partner who has become unreliable.

“There must be a drive for new trade deals, starting with Mercosur,” Rizzi said. “That would send a message to Washington that we are doubling down on the rest of the world, and also a message to countries which are struggling on their own that the EU is a reliable partner.”

That could be complemented by a renewed effort to ensure Europe’s own access to critical materials and minerals, much as the United States has tried to do for years. It would take years to build a mine-to-magnets supply chain with more-or-less reliable suppliers, but that is exactly what Europe’s Golden Gateway answer to China’s Belt and Road Initiative is meant to do. 

For all the sturm und drang in Europe over Trump 2.0, he may turn out to be a blessing in disguise, and not just by pushing for increased defense spending that will be doubly needed after Ukraine is forced to surrender. Just as China turned the United States’ technology trade restrictions into a turbocharger to increase its self-reliance and insulate itself from dependence on the West, Europe could use this confrontation as an intervention, much as the good doctor Draghi ordered.