Opinion

Europe needs to react to Trump’s trade agenda – four urgent questions

It seems increasingly likely that President Trump will govern according to the values of his campaign. On trade, this might lead to major disturbances in the global rules-based order. The EU needs to decide how it will react, and it needs to decide fast.

By: Date: January 26, 2017 Topic: Global Economics & Governance

A version of this piece was also published in Kathimerini.

Kathimerini

When it comes to President Donald Trump, European leaders still seem lost in denial. So far they have reacted to his statements with extreme caution, and there is little discernible strategy. But Trump in office is not much different from Trump on the campaign trail, and Europe needs to think fast.

The challenge that the new US President presents is multi-faceted, as could be seen in his recent interview with German tabloid Bild. When Trump calls NATO obsolete, he brings the entire post-WW2 defence order into question. It is unprecedented that a US president questions the EU because of his experience with environmental regulation when building a golf course. And we cannot ignore his praise for Brexit, which he described as a clever escape from a system designed by and for Germany. This will echo loudly in many parts of Europe, and should provoke deep thinking in both Berlin and Brussels.

However, there is one area where the EU needs a game plan immediately: trade. European trade policy is largely made at EU level. So leaders need to give the EU clear direction on how it should respond, if and when Trump begins to disrupt the global trade system.

In fact, he has already started. Trump has torn up the Trans-Pacific Partnership. And tweets alone were enough to bully car companies into moving factories from Mexico to the US. His threats of a 35% tariff worked. Trump has also turned on the EU. In the Bild interview, he complained that Germans do not buy enough Chevrolets, while Americans buy many BMWs. Europe can no longer pretend that this is not happening.

Policymakers and media often portray Donald Trump’s views on trade as random and unpredictable. But a coherent trade philosophy has been visible for some time. In fact, his values reach back to a 1990 interview in Playboy, where he argued that the US should impose tariffs on Mercedes Benz.

Trump’s words and actions are consistent with a vision. They follow a plan for trade policy set out by his closest trade advisor, Peter Navarro, and his future trade minister, Wilbur Ross. The core of their argument is that all deals which lead to a trade deficit for the US should be renegotiated. Trade deficits are seen as damaging, because they reduce the size of the domestic manufacturing sector which can supposedly provide better paying jobs.

Now, a protectionist US trade strategy will not benefit most US citizens in the long run. For a start, manufacturing jobs are not really better paid than other jobs. In fact, the difference in hourly salaries is less than 3 percent. Moreover, moving manufacturing jobs to the US will be counterproductive, as the higher labour costs will accelerate automation. And tariff wars can raise prices, damaging consumption and employment in other sectors.

But that may not stop this anti-trade agenda being implemented in the next couple of years. On the contrary, President Trump won the election on a clear anti-globalisation ticket and all the signals he is giving suggest that he is determined to follow through.

So how should the EU respond? Europeans urgently need to find answers to the following questions:

What is the best strategy to deal with President Trump as a person?

Trump is likely to be a difficult negotiator. Could face-saving deals offer a strategy for Europe? Symbolic victories have worked in the past with tricky partners, and symbols can be powerful even when cheap. For example, a manufacturer could claim to have transferred an entire factory to the US, when in fact it only closes and replaces an old one.

How should the EU react if the US violates WTO rules to attack non-EU countries?

In one likely scenario, unlawful tariffs on Mexico would hurt many European companies. But this would not constitute a full trade war against the EU. Going to the WTO for arbitration could be part of the answer, as a stronger reaction might escalate the situation. The real question is how strong the EU response to any US infringement of the global trade order should be. And Europe should decide this now, before the event.

If the legitimacy of the WTO itself comes under attack from the US president, how should the EU respond?

The EU has long relied on a strong multilateral trade system. Perhaps this can be sustained by a stronger partnership between the EU and China. A recent speech from President’s Xi’s certainly suggests that China would be ready to play a greater role in underwriting the international rules-based system.

Finally, can the EU take coherent decisions and project its power in trade matters across the globe?

The EU is the world’s largest trade bloc, but has recently struggled to negotiate and implement trade deals. If it comes to a trade war with the US, who can effectively negotiate on behalf of the EU and wield a credible threat of retaliation? Would the EU be ready to agree on changes in corporate taxes concerning exports?

The arrival of US President Trump has ushered in a new phase of globalisation. The reality is that the US and EU economies are tightly intertwined with major factories on both sides. European leaders urgently need to think about how to minimise economic damage. Otherwise the EU risks being caught unprepared for this challenging situation.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Opinion

Immigration: The doors of perception

Surveys show that people systematically overestimate the share of foreign-born citizens among resident populations. Aligning people's perceptions with reality is vital to the betterment of public debate and proposed policies.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: December 12, 2018
Read article More on this topic More by this author

Opinion

The great macro divergence

Global growth is expected to continue in 2019 and 2020, albeit at a slower pace. Forecasters are notoriously bad, however, at spotting macroeconomic turning points and the road ahead is hard to read. Potential obstacles abound.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: December 5, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: Shared prosperity for the EU and north Africa

Bruegel's director Guntram Wolff looks at north Africa's economic growth in the light of the region's trade agreements with the EU, welcoming Karim El Aynaoui and Uri Dadush to the Backstage series on 'The Sound of Economics'.

By: The Sound of Economics Topic: Global Economics & Governance Date: November 27, 2018
Read article Download PDF More on this topic

Policy Contribution

Assessing the European Union’s North Africa trade agreements

In this Policy Contribution, the authors provide an economic assessment of the trade agreements between the EU and North Africa. They argue that the common view of the agreements is overly negative, and point to policy conclusions that could increase regional integration.

By: Uri Dadush and Yana Myachenkova Topic: Global Economics & Governance Date: November 26, 2018
Read article Download PDF More on this topic More by this author

External Publication

Examining interrelation between global and national income inequalities

The author contributed to the new issue of 'The Russian Journal of Economics' with a paper on the global dimension of the inequality trends

By: Marek Dabrowski Topic: Global Economics & Governance Date: November 15, 2018
Read article More on this topic More by this author

Blog Post

Is this time different? Reflections on recent emerging-market turbulence

Since the beginning of 2018, currencies of two large emerging-market economies – Argentina and Turkey – suffered from substantial depreciation. Other currencies also recorded losses. Which factors are determining macroeconomic and financial stability in emerging-market economies? And what can be done to prevent a crisis and avoid its economic, social and political costs?

By: Marek Dabrowski Topic: Global Economics & Governance Date: November 14, 2018
Read article More on this topic More by this author

Blog Post

US mid-term elections and the global economy

Democrats won control of the House and Republicans held onto the Senate in the most consequential US mid-term elections in decades. Bowen Call reviews economists’ and scholars’ analyses of the impact this might have on the world economy.

By: Bowen Call Topic: Global Economics & Governance Date: November 12, 2018
Read article More on this topic More by this author

Opinion

The global economy’s three games

In this column, Jean Pisani-Ferry portrays the current international economic and geopolitical order as increasingly reminiscent of chess. Three key players: the US, China and a loose coalition of the other G7 members play three games simultaneously, and no one knows which game will take precedence.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: October 29, 2018
Read article Download PDF More on this topic More by this author

Policy Contribution

Should we give up on global governance?

The pervasive gridlock affecting the traditional global governance approach calls into question the idea of broadening its scope beyond its core remit, and it calls for alternatives, either as substitutes for obsolete arrangements or to address emerging collective action problems in new, inadequately covered fields.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: October 23, 2018
Read article More on this topic More by this author

Blog Post

The United States-Mexico-Canada free trade agreement (USMCA)

While final ratification of the USMCA (also known as Nafta 2.0) is pending, we review economists’ assessment of the agreement.

By: Silvia Merler Topic: Global Economics & Governance Date: October 22, 2018
Read article More on this topic More by this author

Opinion

How could Europe benefit from the US-China trade war?

Under pressure from the US, Beijing is set to be more open to making new allies.

By: Guntram B. Wolff Topic: Global Economics & Governance Date: October 18, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: The new balance of Asia-EU-US trade relations

Amid the Asia-Europe Economic Forum on the fringes of the 12th ASEM Summit, Bruegel senior fellow hosts a conversation on developing global trade relations, with guests Moonsung Kang, professor as Korea University, and Michael G. Plummer, director at SAIS Europe – Johns Hopkins University, for an episode of the Bruegel Backstage series on ‘The Sound of Economics’.

By: The Sound of Economics Topic: Global Economics & Governance Date: October 17, 2018
Load more posts