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

Summary:
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. A version of this piece was also published in 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

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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.

A version of this piece was also published in Kathimerini.

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

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.

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Guntram B. Wolff
Guntram Wolff has been the Director of Bruegel since June 2013. His research focuses on the European economy and governance, on fiscal and monetary policy and global finance.

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