Trump Tariff Threat Leaves EU Looking for Plan B

(Bloomberg Opinion) -- The European Union should “stop grumbling about Trump and start doing business with him,” according to Dutch Prime Minister Mark Rutte. That will be easier said than done. For why, look no further than the U.S. President's threatened auto tariffs.

The U.S. is looking at unilaterally imposing a 25 percent tariff on cars imported from abroad on the flimsy ground they are a threat to national security. Such a measure would be costly for Europe's export powerhouse of Germany, as my colleague Leonid Bershidsky has pointed out – but would also hit jobs in America's auto industry as supply chains are disrupted.

So what could Europe do to avoid a trade war? There is hope that cooler minds will prevail and Trump might just back down, as voices within the Republican party and U.S. business warn against self-harm, according to UniCredit SpA economist Daniel Vernazza.

But it's a risky bet. Trump's behavior so far suggests a preference for unilateral action that seeks to undermine multilateral institutions like the World Trade Organization and redraft existing arrangements to America's advantage. Would he ever permanently withdraw a tariff threat?

Alternatively, the EU could give the President the bilateral deal he is craving: Germany is open to “zero” tariffs on cars, according to Economy Minister Peter Altmaier, although on Tuesday he said that trade talks with the U.S. were reaching the “ most difficult part.” That may be a way of saying tariff-free trade sounds like a stretch.

Reaching a deal quickly would mean clearing a mountain of objections on both sides. Trump complains about relatively high tariff barriers from the EU and resistance to opening up its agriculture markets, while the EU complains about protectionist “Buy-American” provisions. Going by Trump's behavior and rhetoric, it is Europe that would have to make big concessions.

That bloc could still find other ways to respond, by protecting its own market and upholding the principles of multi-lateralism. According to Maria Demertzis, deputy director at the Bruegel think tank, it means retaliating swiftly and in kind to any tariffs imposed by the U.S. – something the EU has reiterated it would do.

It also means refusing to give in to the short-term temptation of making big concessions to convince Trump not to pull the trigger. Europe could offer tomorrow to reduce exports to the U.S., smooth things over with other trade partners, withdraw its complaints against the Trump administration at the WTO, and slash non-tariff and tariff barriers to trade. But there would be significant long-term costs – not least that others might be emboldened to take unilateral action.

At the WTO, Europe could try to build an alliance of countries to counteract the U.S.'s blocking tactic. With the appeals court being drained of nominated judges, creating an alternative process would be a big step forward.

The EU could also try working with other countries in order to achieve goals such leveling the trade playing field with China. Trilateral talks between Europe, Japan and the U.S. are being used to find common ground against industrial subsidies, forced technology transfers and WTO reform. They could continue, even as Trump pushes for a bilateral deal with China.

Europe has a lot to lose from an escalating trade spat, with around 0.3 percent of euro-area GDP at risk, according to Bank of America. If the tensions can't be defused, Europe needs a clear plan B.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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