New tools that Brussels isn’t yet ready to use on Donald Trump

Another week, another flurry of haphazard news about Trump’s tariff policies and the alleged deadline of August 1 to reach a deal before the “reciprocal tariffs” supposedly snap back into place. Today I look at the latest in the saga of talks with the EU, which is by far the most consequential of the bilateral negotiations. They’re not going brilliantly. Charted Waters, where I look at the data behind world trade, is on the dollar.

Escalate, capitulate or complicate

To recap: I’ve said a few times that the EU seems to waver between different strategies, which we might call escalate, capitulate and complicate. It started off with an uncompromising position that it would not countenance even the 10 per cent “baseline” Trump tariff without retaliation. Then it came up with a more emollient view that it would accept such a tariff as long as it could bargain down sectoral tariffs, particularly those on its precious car industry. Then it came up with a fiercely complex scheme for netting off car imports and exports. When that failed to get traction it reverted to a more traditional offer of reciprocal tariff cuts on cars.

As ever with Trump, who knows how much of what he does is bluster, but it would appear that to him this looks like weakness and he is responding appropriately. On Friday my Financial Times colleagues reported that Trump had increased his demand for the baseline tariff to as much as 15-20 per cent, not far below the 30 per cent he originally threatened. Trump also seems happy to keep car tariffs where they are.

This last, at least, makes sense from a political economy point of view. Whether Trump grasps this is doubtful, since he makes a big fuss about the EU car tariff of 10 per cent supposedly blocking US manufacturers from exporting to Europe, but in reality the Detroit carmakers don’t make the small cars that sell well in Europe and so wouldn’t gain much from that tariff being cut. They do, however, benefit from being able to make pick-up trucks and large SUVs for the US market by hiding behind the US’s 25 per cent tariff on those particular vehicles.

The limits of the EU’s strategy of treating this as akin to a normal trade deal are now evident. Despite Trump’s fulminations about a protectionist Europe, it doesn’t have a whole lot in terms of tariffs that it can bargain down — unlike, say, Vietnam, which has apparently agreed to cut its high tariffs to nil. The EU does have a bunch of regulatory barriers, such as the infamous chemical-washed chicken, that do have an impact but which would cause riots if they were abolished. There is a reason that previous EU-US trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP) essentially went nowhere. There isn’t much to bargain over that isn’t politically toxic.

The EU’s done a couple of things that might mollify Trump, but they’re more in the area of sins not committed than existing wrongs undone. It’s decided not to push ahead with a bloc-wide digital services tax — though to be fair that was going to be a very difficult project anyway — and it’s suspended an investigation into Elon Musk over a digital transparency probe. But national-level DSTs remain in place, and going easy on Musk is probably rather less pleasing to Trump than it was a couple of months ago.

Unlocking the weapons chest of economic security

If jaw-jaw isn’t working, how about war-war? Again the EU is going through its usual processes in coming up with “rebalancing” (retaliatory) goods tariffs. Again it’s not clear whether Trump will care unless the EU can make them so huge it triggers a big US financial market reaction. Certainly he’s unlikely to pay much attention to lobbying from senators and congressmen whose districts are hit by targeted retaliation.

So far Brussels has yet to go beyond that traditional toolbox and get out some new instruments. Tobias Gehrke’s paper for the European Council on Foreign Relations back in March gives a comprehensive inventory of the ordnance available, particularly using tech and data regulation to go after Trump’s Silicon Valley pals. And the anti-coercion instrument the EU launched in 2023 gives it wide legal cover to act.

There’s a real sense that the traditional approach isn’t working. Jean-Luc Demarty, former head of the European Commission’s trade directorate, says a reasonable deal is impossible with Trump. “We should treat Trump as China did and apply deep retaliation, including on services with the anti-coercion instrument,” he told my FT colleague Andy Bounds. “That is the only way to force Trump to backtrack.” This is striking language. Demarty was never exactly a pussycat as a negotiator, but neither was he a reckless trade warrior.

Sorry to say, though, the EU just isn’t ready. It’s got the technical and legal tools but the political economy is not yet lined up. Some member states are concerned about alienating Trump because of the US role in Ukraine; some are concerned about counter-retaliation; some are quite sympathetic to him anyway. The EU started talking about economic security and a geopolitical trade policy years ago, but hasn’t got there.

Europe is famously forged in crises, but the Trump tariff threats aren’t going to create some major innovation in EU trade policy before August 1. Trump might chicken out, of course, but preparing for the worst is better than assuming the best.

Charted waters

As noted in the links below, the dollar’s steadying earlier this month has turned into a very miniature rally.

Trade links

JPMorgan economists look at how tariffs are starting to show up in consumer price inflation.

The FT’s Unhedged interviews Michael Froman, US trade representative under Barack Obama in rather more normal times.

The US economy has been quite resilient to the Trump tariffs so far, which has led to a stabilising of the dollar.

The US mining industry isn’t happy with the US government taking a supposedly “China-style” direct stake in a rare earths producer.

I sounded the alarm a while back about the apparent inability of the Asia-Pacific CPTPP agreement to settle disputes arising between signatories, so fairness dictates I record when it does, in the form of a rapprochement between milk exporter New Zealand and milk protectionist Canada in a dispute over dairy quotas.

The chair of the world’s largest copper producer says he doesn’t understand what Trump is trying to achieve with his copper tariffs, and if he doesn’t, neither does anyone else.

Trade Secrets is edited by Jonathan Moules