What Do Steel Tariffs Have to Do With Iran? Plenty

(Bloomberg Opinion) -- Europe's temporary waiver from U.S. import quotas on steel and aluminum is about to expire, and most experts are pessimistic that a U.S.-EU trade war can be avoided. They can't fathom a trade deal that would satisfy both U.S. President Donald Trump and European Union leaders — at least not a conventional trade deal.

But a conventional trade deal does not seem to be what the Trump White House really has in mind. Instead, it wants to exchange trade peace for foreign and security policy concessions. That's a novel — and potentially fraught — way for an American president to do business with his closest allies. But in the short term, it might deliver some results that Trump can use to declare victory.

Trump's hope seems to be that the threat of tariffs gives him leverage to get the cooperation he wants on European defense spending and sanctions on Iran. U.S. Treasury Secretary Steven Mnuchin recently told CNBC, the U.S. cable news network, that President Trump would factor military contributions to NATO into the application of a 25 percent tax on imported steel and 10 percent on aluminum.

The implication was that the U.S. would climb down from its threat to impose steel and aluminum tariffs so long as EU countries keep their promises, made at the 2014 NATO Summit in Wales, to increase their defense spending to 2 percent of GDP. Since Trump is also threatening the EU with tariffs on imported cars, he might be willing to bargain those away too for more European defense spending.

In another sign of Trump's new approach, U.S. Ambassador to Germany Richard Grenell, in an interview with the New York Times, suggested the president might be willing to grant the EU bloc permanent exemption from the trade tariffs in exchange for strong cooperation with the U.S. on Iran.

The linkage tactic may seem outrageous to politicians in Berlin and Brussels. It may be dismissed as mere Trumpian impulse by others. But it's not so easily ignored or countered.

One in every two jobs in German industry (and one in every four jobs generally) is directly or indirectly related to German exports. Trump's threat may spur these export interests to pressure Berlin for more German (and European) cooperation with the U.S. on Iran sanctions or defense spending — whatever it takes to return to business as usual.

Trump's demands on the defense spending front are not some new red line. They actually echo those of previous administrations, with the difference being that he is willing to force the issue with his linkage tactics.

Berlin may be responding to the ramped up pressure. It will reportedly tell NATO that it expects to increase military spending to 1.5 percent of GDP by 2025, from 1.2 percent currently. That is more defense spending than what was in the draft federal budget which was so low that German Defense Minister Ursula von der Leyden protested and asked for more money. That's a positive for the U.S.: Germany's policy of military neglect that makes it much harder for the EU to project influence and weakens the overall credibility of the Atlantic Alliance.

German defense spending still falls short of the promised 2 percent and is unlikely to change much more under the current coalition government. But while Trump can't push Germany further on its military budget, he can still try to secure more concessions on Iran, another key demand.

At last week's summit between French President Emmanuel Macron and Vladimir Putin, the Russian president seemed to offer support to Macron's plan for an upgraded Iranian deal that would include Iran's ballistic missiles and its destabilizing activities in the Middle East. Trump's threat of sanctions against EU companies doing business with Iran is likely to have been a factor behind Macron's willingness to facilitate pressure on Iran to accept new terms.

None of this means Trump will get his way entirely. Germany has pushed back against Trump's defense spending demands and his criticism of the Nordstream 2 gas pipeline from Russia. There is plenty of domestic mileage for Merkel in standing firm. And, of course, bullies don't tend to keep friends, so Europe's acquiescence may come at a later price. Trump isn't concerned about the mess that has to be cleaned up later. For now, it seems, his strategy of linking trade concessions to security policy demands is getting him somewhere.

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net

©2018 Bloomberg L.P.