Trump's Tariff Barrage Forces the EU Into a Corner

(Bloomberg Opinion) -- Is there any method to Donald Trump's madness on trade?

Politicians and investors are all struggling to make sense of the U.S. president's tendency to stop, go, and reverse course in his dealings with China and Europe. Financial traders went to sleep on Monday basking in the glow of a trade truce with Beijing. They woke up on Tuesday to the news that the Americans had expanded a list of European products that may be whacked by tariffs (under the guise of the long-running state subsidy dispute between Airbus SE and Boeing Co.). Trump hasn't lost any of his willingness to aim the trade weapon at friends, allies and partners, however harmful the consequences might be for his own side.

For those with experience of the way things used to be, trying to rationalize Trump is futile. I sat down recently with Pascal Lamy, who ran the World Trade Organization for eight years after two long spells at the European Commission. “There is no strategy,” he said of Trump, seeing instead the kind of short-term bluffing tactics packed in his book, “The Art of the Deal.” The question for the rest of the world is how to accommodate such a man.

One difficulty with Trump is that while he's maddeningly scattergun in how he approaches trade relations, he does sometimes have a point. Lamy may express grim concern about the president's attempt to tear up a global consensus built over decades, but he concedes that changes are needed. The trading system has struggled to reflect the shift in economic heft from West to East, the WTO's rules aren't tough enough on the use of market-distorting subsidies by many countries, and China's economic model has become much more state-directed over time.

Of course, none of this is to say that Trump's wrecking-ball approach is the right way to change things, nor to deny that the American government's ultimate aim is to weaken international institutions and reassert U.S. primacy. The big question in Europe is how to avoid suffering too much damage. Lamy's view is that the only sensible solution is to prepare for the worst to mitigate the impact of an entirely capricious White House. “Things will get ugly,” he reckons.

The latest round of tariffs threatened by the U.S. – on about $4 billion worth of European Union imports such as cheese, milk, and Irish and Scotch whiskies – is a case in point. At first glance they look similar to previous threats over EU car imports and last year's exchange of tit-for-tat tariffs between the Americans and the Europeans. The big difference this time is that they're being pitched as an innocent response under WTO terms to the decades old Airbus-Boeing standoff.

This will give Trump just enough cover to claim he's trying to work with the current system, even as he does all he can to weaken it. The U.S. is simultaneously blocking nominees to the WTO's appeals panel, meaning the global rule-setter for trade could be paralyzed by the end of the year. If the Americans succeed in hobbling the WTO, that would give way to what the EU has called “the rule of the jungle.” Only the mightiest economies and trading blocs would have the strength to protect their trade interests.

Lamy's “preparing for the worst” would include a more muscular attempt by Europe to build a global trade system that effectively cuts out the U.S. and reinvigorates the existing rules. Recent EU trade deals with Japan and Mercosur, the South American trading bloc, are no doubt an attempt to try just that. Unfortunately, forming a more aggressive counter-alliance against Washington looks a pretty big reach for Europe.

The former WTO chief is certainly correct to diagnose that the phenomenon of Trumpism (or its nationalist successors) will last well beyond 2020 and that Europe needs to plan accordingly. But the EU is still a bloc that relies very much on soft power so its freedom of action is limited. It's also home to nativist right-wingers like Italy's Matteo Salvini and Hungary's Viktor Orban, making it difficult to build a united front on Trump.

Indeed, the EU is in talks with the U.S. for a future trade deal that may well be signed with Trump still in the White House. Any new bilateral deal might see the WTO weakened further. While Trump's strategy may be all over the place, his willingness to use American power – however haphazardly – isn't easy to resist. 

To contact the editor responsible for this story: James Boxell at jboxell@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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