Is Europe ready for a trade war?

PARIS – US President Donald Trump’s decision to impose import tariffs of 25% on steel and 10% on aluminum is surprising neither for its expression of protectionist ideology nor for its sheer economic irrationality. Rather, it is surprising because it has primarily targeted the European Union. Why is Trump taking measures against one of America’s main allies instead of its principal strategic adversary, China?

PARIS – US President Donald Trump’s decision to impose import tariffs of 25% on steel and 10% on aluminum is surprising neither for its expression of protectionist ideology nor for its sheer economic irrationality. Rather, it is surprising because it has primarily targeted the European Union. Why is Trump taking measures against one of America’s main allies instead of its principal strategic adversary, China?

Trade has always been a highly politicized issue in the United States, which is the only country to have trade policy featured in the first article of its constitution. But the US is also unique in two other ways. First, Americans are much less dependent than others on world markets, owing to the sheer size of their own. That fact alone makes protectionism seem less risky.

Moreover, the relative weakness of the US welfare system makes the country more sensitive than Europe to the social consequences of job losses due to foreign competition. This helps to explain why former Secretary of Commerce Donald Evans once quipped that Americans are more likely to believe in Martians than in the benefits of free trade.

Second, the US regards trade primarily as an instrument of political sovereignty, whereas European countries since the end of World War II have viewed it as a tool for delivering prosperity and limiting conflict. The US willingly takes part in international commerce whenever doing so strengthens its sovereignty, and it withdraws whenever Americans feel threatened. As staunch sovereigntists, Americans do not see fixed rules, only politics. They are interested in outcomes, not principles.

In fact, the US wins more than 85% of the dispute-settlement cases that it argues before the World Trade Organization. Yet, under Trump, it is becoming increasingly hostile toward that institution. According to Trump’s more protectionist economic advisers, the WTO is diluting US sovereignty by creating, rather than simply implementing, trade laws.

Europeans, for the most part, have come to understand the important role that EU jurisprudence plays in national legal systems. The EU is built on a foundation of shared and integrated sovereignty, which, in the eyes hardline sovereigntists like Trump, is pure heresy.

But Trump’s hostility toward Europe stems not only from his contempt for the EU’s idea of sovereignty, but also from his obsession with reciprocity. Trump is convinced that, after aiding in the European post-war recovery, the US has long offered systemic advantages to the European economy. To his mind, it is time for Europeans to repay the favor, even though it isn’t all that clear which European economic and commercial activities benefited from supposed US-conferred advantages, unless one links trade with security.

To be sure, the Trump administration is not entirely wrong to call out countries, like Germany, with large current-account surpluses, about which all countries, including in Europe, should be concerned. But those issues should be raised at the G20, and handled separately.

The worry now is that the US will try to use the steel tariff as a bargaining chip to extract EU concessions in the automobile sector – a significant concern for Germany. Reduce the duty on cars imported from the US, the Trump administration will say, and your steel exports will be spared. After all, this is how the administration has been dealing with Canada and Mexico. Trump has temporarily exempted those two countries from the tariffs, but now expects concessions from them in his administration’s renegotiation of the North American Free Trade Agreement.

While the US has, on average, less tariff protection than Europe, the difference is minor (Europe’s unweighted customs duty averages 5.2%, versus 3.5% for the US). Both countries maintain relatively open economies with stronger protections in specific sectors. Regulatory divergences are a much more important obstacle to US-European trade than tariffs.

So, how should Europe react? Economically, the cost of the steel tariff is large, but hardly devastating. It will have only a minimal effect on European steel production. Nevertheless, the EU will be forced to protect itself, lest exports originally destined for the US end up stuck in Europe. And in doing so, Europe could find itselfunintentionally thrust into trade conflicts with other countries, whose steel exports to the US will be redirected largely toward the European market.

Looking beyond the EU’s immediate response, Trump’s move raises two larger questions for Europe. The first concerns Trump’s principal objective, which remains unclear. Does he want to extract concessions from the EU in all industrial sectors in which US firms are lagging? Or does he have an even larger goal, such as pulling the US out of the WTO? In that case, Europe must start preparing itself. It is anyone’s guess if a global trading system without the US would even be viable, and under what conditions.

The second question concerns China, which has not hesitated to exploit legal grey areas unregulated by the WTO to advance its economic and geopolitical interests. Up until now, the US and the EU have had shared foreign-policy goals with respect to China. But if Trump has prioritized antagonizing Europe over winning its support against China, then that is surely a windfall for the Chinese.

Europe’s leaders need to convince Trump of two things: that Europeans and Americans have common interests, despite occasional divergences, and that trade advantages in the twenty-first century stem not from tariffs but from the establishment of common standards. Setting the standards that will govern autonomous vehicles and related technologies is far more important than protecting old industries.

The European response to Trump’s import tariffs should thus be twofold. First, the EU should retaliate – but only if the US does not exempt the EU from its higher tariffs. If the Trump administration shows some openness to giving Europe a better deal, the EU should try to focus on opening a broader dialogue on trade with the US.

Second, the EU should approach the Trump administration about tackling shared regulatory concerns and defining a common stance vis-à-vis China. We have so much in common. When French President Emmanuel Macron visits Washington, DC, next month, that is the message he needs to convey on behalf of Europe.

Zaki Laïdi, Professor of International Relations at Sciences Po, was an adviser to former French prime minister Manuel Valls. His most recent book is ‘Le reflux de l’Europe’.

Copyright: Project Syndicate.

 

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