On so-called Liberation Day, President Donald Trump delivered on his campaign promise of imposing universal tariffs on US trading partners. Trump hit all countries that export to the US with a flat 10% tariff, as well as additional levies on the “worst offenders.”
Trump hit the “pathetic” European Union with a 20% duty on goods made in the bloc. The consequences for both the US and the EU could be immense. The move conclusively ends the US commitment to ever-closer trade relations across the globe and leaves the EU with a retaliatory dilemma that could test the bloc's solidarity.
The trade war that has been simmering since Trump first took office will now be supercharged – leaving poorer nations in the global south out in the cold.
The EU has already said that it will retaliate, with Commission President Ursula von der Leyen making clear the EU executive is readying countermeasures. Earlier this year, the Commission already reacted to US steel and aluminium tariffs by imposing €26 billion in reciprocal taxes on American goods.
The EU can, and likely will, do more. Beyond traditional levies on goods, the bloc could hit US services hard by cracking down on Big Tech, imposing digital services taxes or revoking protections for US intellectual property.
The US relies on many EU goods to run its economy, including advanced German machinery or the Dutch machines producing the most advanced semiconductors are heavily relied on by the US. These products could be hit with export controls depriving the US of its supply. These measures would be highly controversial, but in a hot trade war they could be fair game.
An effective EU response depends on the EU27 presenting a united front. Unity is essential for restrictive measures to pass and for them to be effectively implemented across the single market.
But when the going gets tough, the EU27 have a long track record of splintering. The fight over imposing tariffs on Chinese electric vehicles is just one in a long list of recent examples.
Some member countries are already pushing back against the Commission’s proposed tariffs on €26 billion in US goods, fearing escalation from Trump, a real threat made in his presidential order.
Tariff retaliation dilemma
Trade wars are costly. As von der Leyen has said “the global economy will massively suffer” from the new tariffs. She is right. A new study from Aston University puts the costs of the coming trade war as high as $1.4 trillion globally. Responses to Trump’s tariffs will determine the final height of these costs. The ultimate cost of the tariffs will be determined by how the EU and other trading partners respond.
For most of the countries hit by the US the best move would likely be to do nothing. This is unlikely to be politically viable but getting down and dirty will entail costs.
The threat of EU retaliation has been dismissed by Trump, who said “they can try, but they can’t.” In Trump’s mind, the EU is reliant on the US market. To some degree this is true. The EU sells more goods to the US than the other way around. However, in trade in services, the Americans lead, closing the trade deficit considerably.
While the EU should fight back in the short term, it needs to draw up plans for how to live with a hostile US.
Tariffs tend to be sticky. When US tariffs spiked in the 1930s, it took years to bring them down to their previous level. Following Trump’s first term, President Joe Biden did little to roll back trade restrictions imposed by his predecessor, even increased rates in some instances. The EU cannot simply wait out Trump and expect things to go back to normal.
Instead, the EU should derisk from the US. Often overlooked in favour of import dependencies, being overly reliant on a single market for exports carries its own risks. In fact, we will be seeing these risks play out in the coming months if Trump’s tariffs stick. The Union should strike deals with other countries hit by the US – both to open new markets for EU goods but also help alleviate the pain inflicted on these countries as well.
The last decades have offered an unprecedented time of trade openness and globalisation. We are now on the cusp of something unfamiliar and the “strongest kind of fear is fear of the unknown.” It will take EU unity and a Union firing on all cylinders to make it in the new Trump tariff trade world.
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