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

Podcast

Podcast

Director's Cut: Balancing free trade with national security interests

In this episode of Director's Cut, Stephanie Segal of CSIS joins Bruegel's Guntram Wolff and Maria Demertzis for a conversation about the tension between free trade and national security issues, and the emerging threats to multilateralism.

By: The Sound of Economics Topic: Global Economics & Governance Date: February 19, 2019
Read article

Opinion

What can the EU do to keep its firms globally relevant?

There is a fear that EU companies will find it increasingly difficult to be on top of global value chains. Many argue that EU-based firms simply lack the critical scale to compete and, in order to address this problem, that Europe’s merger control should become less strict. But the real question is where the EU can strengthen itself beyond the realm of competition policy.

By: Georgios Petropoulos and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: February 15, 2019
Read article More on this topic More by this author

Blog Post

How the EU could transform the energy market: The case for a euro crude-oil benchmark

There is a strong case for an oil benchmark in euros. Trading energy markets in more than one currency is not unprecedented, and indeed used to be the norm. Europe – with its powerful currency and reliable regulatory environment – should stand a good chance of success.

By: Elina Ribakova Topic: Energy & Climate Date: February 13, 2019
Read about event More on this topic

Past Event

Past Event

The world’s response to China’s Belt and Road Initiative

This event will look at the Chinese Belt and Road Initiative as well as the response from the rest of the world.

Speakers: George Cunningham, Uri Dadush, Jean-Francois Di Meglio, Theresa Fallon, Alicia García-Herrero and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 8, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Reflections on five years of China's Belt and Road Initiative

Bruegel fellows Alicia García-Herrero and Uri Dadush join Guntram Wolff for this Director's Cut of 'The Sound of Economics', focusing on the progress made by China's Belt and Road Initiative, how it will continue to develop, and the reactions it has stirred across the world.

By: The Sound of Economics Topic: Global Economics & Governance Date: February 7, 2019
Read article Download PDF More on this topic

Working Paper

Countries’ perceptions of China’s Belt and Road Initiative: A big data analysis

Drawing on a global database of media articles, the authors quantitatively assess perceptions of China’s Belt and Road Initiative (BRI) in different countries and regions. They also identify the topics that are most frequently associated with the BRI.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: February 6, 2019
Read about event More on this topic

Past Event

Past Event

Rules-based trading system and EU-Australia

At this event the Australian Minister for Trade, Tourism and Investment, Senator the Hon Simon Birmingham will speak about Australia-EU bilateral trade, the FTA negotiations and the importance of multilateral rules-based trading system

Speakers: Senator the Hon Simon Birmingham, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 22, 2019
Read article Download PDF More on this topic

Policy Contribution

The Belt and Road turns five

Five years after its launch, Michael Baltensperger and Uri Dadush reflect on China’s Belt and Road Initiative. The plan to revive ancient trade routes has the potential to enhance development prospects across the world and in China, but that potential might not be realised because the BRI’s objectives are too broad and ill-defined, and its execution is too often non-transparent, lacking in due diligence and uncoordinated.

By: Michael Baltensperger and Uri Dadush Topic: Global Economics & Governance Date: January 10, 2019
Read article More on this topic More by this author

Opinion

Lose-lose scenario for Europe from ongoing China-US negotiations

Without an expectation of a larger market for European exports in the absence of additional opening up by Chinese authorities, European exporters should not enjoy the ongoing China-US negotiations.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: January 9, 2019
Read article More by this author

Podcast

Podcast

Director’s cut: Wrapping up 2018

With 2018 drawing to a close, and the dawn of 2019 imminent, Bruegel's scholars reflect on the economic policy developments we can expect in the new year – one that brings with it the additional uncertainty of European elections.

By: The Sound of Economics Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: December 20, 2018
Read article More on this topic More by this author

Opinion

China’s view of the trade war has changed—and so has its strategy

The truce agreed on by China and the United States at the sidelines of the recent G-20 meeting in Buenos Aires doesn’t really change the picture of the U.S.’s ultimate goal of containing China. The reason is straightforward: The U.S. and China have become strategic competitors and will continue to be so for the foreseeable future, which leaves little room for any long-term settlement of disputes.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: December 19, 2018
Read article More on this topic More by this author

Blog Post

Brexit: Now for something completely different?

The life of Brexit. After a week of ECJ rulings, delayed votes, Theresa May’s errands across Europe and the vote of no confidence, we review the latest economists’ opinions to try to make sense of what has changed and what hasn’t.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: December 17, 2018
Load more posts