Just what is behind the US President Donald Trump’s 50% tariff on EU imports to the US? Your guess is as good as mine or anyone else’s in all honesty.
This latest policy swerve came out of nowhere yesterday morning in Washington – just when people here might have been expecting wind down ahead of a long Memorial Day weekend.
Instead Mr Trump’s social media post had a laxative effect on financial market traders on both sides of the Atlantic.
However, it was not the full-on brown trousers event we have seen in previous bouts of tariff induced market meltdowns.
The reason for that is China. The markets know that Mr Trump has a pain threshold, driven by the pain thresholds of big US companies, especially the ones whose CEOs have played golf with the President.
The China tariffs quickly escalated through tit-for-tat retaliation until they reached unfeasible levels. They made it impossible to trade. And trade stopped – which given China’s massive trade surplus meant exports from China to the US stopped.
That in turn meant the big retail bosses from Walmart and Target calling the White House to tell the president there would be empty shelves in a matter of weeks, while the boss of the port of Los Angeles, the nations biggest, was on TV telling us about how few ships were coming in to be unloaded with containers of consumer goods and industrial components.
Almost as swiftly as they had risen, the China tariffs were cut to 30% for a new 90-day negotiating period.
The EU does not work like China. And that may be part of the current problem, at least from a US perspective.
On one hand, the EU house style is not to escalate tensions, not to engage in megaphone diplomacy, not to ratchet things up in public, and above all to try and remove emotion from the equation. Think Michel Barnier during Brexit. Think Maroš Šefčovič and his near subterranean diplomacy in the post-Brexit period.
On the other hand, not rising to the bait can make the bait-dispenser dispense more bait. So the general EU tariff rate of 20% has been raised by Mr Trump to 50%.
It was a suggestion in his morning social media post, but by that afternoon, in another policy swerve, he told reporters it was now fixed policy, and was starting on Sunday week, 1 June. When asked by a journalist if the EU could negotiate a deal in nine days (from Friday) he said:
“I’m not looking for a deal. I mean, we’ve set the deal. It’s at 50% but again, there is no tariff if they build their plant here. Now, if somebody comes in and wants to build a plant here, I can talk to them about a little bit of a delay,” Mr Trump.
“We’re going to see what happens. But right now, it’s going on on 1 June, and that’s the way it is”.
Earlier that day his Treasury Secretary Scott Bessent told Fox News the 50% suggestion was intended to speed up negotiations with the EU, to force them to make a “high quality offer”.
“The 90-day pause on the 2 April tariffs was based on countries or trade blocs coming to us and negotiating in good faith. And I believe the President believes that the EU proposals have not been of the same quality that we’ve seen from our other important trading partners,” Mr Bessent said.
Mr Bessent was also asked by the interviewer if a deal could be done in nine days.
“I’m not going to negotiate on TV, but I would hope that this would light a fire under the EU, because as I’ve said before, the EU has a collective action problem here,” Mr Bessent said.
“It’s 27 countries, but they’re being represented by this one group in Brussels. So some of the feedback that I’ve been getting is that the underlying countries don’t even know what the EU is negotiating on their behalf.”
It is quite a heavy charge sheet, implying the EU is not negotiating in good faith, and that the member states do not know what is going on, implying the Commission is out of control.
We know from Brexit how closely member states watch trade negotiations, set parameters and lobby for their own interests, in Brussels and beyond.
However, the US tactic may be to spread confusion about who does what. Or maybe they are simply confused themselves (though this is less likely to be the case with the US Trade Representative Jamison Grier, who knows the Brussels setup well).
The confusion may come from the fundamentally different nature of the EU, which is confederal in that the member states have most of the power, and the US, where the Federal Government has most of the power.
The push and pull of “states rights” is a feature of both systems, but when it comes to raw political power, in the US it is centralised, in the EU it is diversified through a network of national governments, national parliaments, and EU institutions.
It is not quite “the blue and the grey” of the US civil war era, but the EU is quite unlike anything else out there, less than a nation state, but more than an international organisation.
This can make it tricky to deal with, unless you are quite precise in what you want.
Even a relatively straightforward trade and investment deal can run aground on objections in a single member state: see Ireland’s failure to ratify the EU-Canada trade agreement (which is not a good look if you are trying to enlist the Canadians in an effort to mitigate the worst damage from Mr Trump’s tariffs).
The problem for the Trump administration is that it appears to have bitten off more than it can chew in a 90-day negotiating period with such a complex and large political and economic entity.
Consider Mr Trump’s answer when asked by a reporter if there was anything the EU could do to avoid the 50% tariff:
“They haven’t treated us properly. They haven’t treated our country properly. They banded together to take advantage of us. I’m sure the European Union wants to make a deal very badly, but they just, they don’t, they don’t do it right,” the US president said.
Mr Trump added: “They won a $17 billion lawsuit from Apple, and I read that case, and that’s not a case that should have been won. They’re suing other companies. They use this as a weapon, but they use it really, to raise funds for what they do.”
“They don’t take our cars, they don’t take our agriculture, they don’t take anything, but we take their cars by the millions. And therefore, they have the jobs, they get the money and we get closed plants. It’s not going to happen that way anymore”.
No, it is not true that Europe does not take US cars, agricultural produce or anything else from the USA. Nor is it true that the EU was formed to take advantage of the US.
Nor are fines from the European Court of Justice fundraising mechanisms for member states of the EU itself (Ireland, which got the Apple money, opposed the Commission’s right through the court process and sided with Apple).
The US president also apparently did not see any irony in talking about fundraising schemes targeting Apple on the very day that he announced a 25% Tariff on Apple iphones, unless they are made in the USA.
That sparked not only a sell down of Apple shares, but questioning by many if the president had the legal right to tariff a single company.
However, come the signing ceremony where he made his public remarks, the president’s policy swerved once again, saying the phone tariff will apply not only to Apple but to Samsung and indeed anyone who wants to sell phones in the US.
None of the many commentators on US business channels believe for one moment that anyone can set up a US only manufacturing plant in the space of a single presidential term – shifting the supply chain alone is a colossal logistical exercise. And then there is the cost which will be passed to consumers.
As one Wall Street type quipped, Apple would be well advised to start the process of building something big, then when Mr Trump is gone from office, turn it into a warehouse.
What are the EU best advised to do?
Perhaps the EU needs to help the US find ground which they can easily take and then declare victory, before a real and deeply damaging trade war begins.
When dealing with the confederates across the river, the feds should narrow down what they want – a common complaint in Brussels is that nobody knows what they’re asking for.
There is no point in asking Mr Šefčovič to cut a deal on VAT – or any other tax.
As we know well from the Corporation Tax reforms (the ones Mr Trump has pulled the US out of), taxation is an exclusive member state competence and no member state is going to abandon VAT. It is a great tax that brings in loads of money, and does not discriminate against US goods – everyone gets hit for this.
Additionally, EU member states all like to lobby to push their own economic interests.
Mr Bessent’s comments about member states not knowing what the Commission is negotiating may be related to the large number of EU ministers and prime ministers who have been through Washington since Mr Trump’s return to the White House, all seeking to curry favour with the administration.
In Ireland’s case, the Taoiseach, Tánaiste, agriculture minister and minister for enterprise have all been to the US in the past 60 days.
Non-tariff barriers are technically fraught, and usually take years to negotiate down but there are ways.
The EU has cut up rough with other countries down the decades, notably Japan, in a bid to get technical barriers to trade reduced: Brussels lore from the 1980s has it that the Japanese government used to block imports of skis on the grounds that Japanese snow is different to European snow!
Something can be done, but a comprehensive slashing of trade red tape in 40 days – or even nine days – is probably ‘Mission: Impossible’ territory especially if member states have to get involved. Which they will.
And even though the Commission has primacy in negotiating trade in goods deals, it has to share power with the member states when it comes to international deals on services.
Again, the US is looking for fundamental change, and it is most unlikely – certainly not within the very tight negotiating deadlines the president has set.
Trade surplus
The two sides cannot even agree on the extent of the trade surplus the EU runs with the US.
The EU side includes the trade in services, where the US has a big surplus that reduces the trade gap to about $150 billion in the EU’s favour – a gap it aims to close by buying a lot more US energy, especially Liquified Natural Gas (LNG).
The Americans say the gap is more like $250 billion – because they don’t include services, the area where they are the dominant partner and yet they want action to open up the EU market even more, particularly in the area of financial services.
The EU does need a more dynamic financial services sector, with the deep pockets and speed of mobilising capital that could grow the EU economy well above its current, flatline rate.
However, is it ready to cede regulatory control to the US, a country where some of that regulatory control is being dismantled by the Trump Administration?
The EU certainly needs a shake up and has a whole book of detailed analysis and recommendations on the topic, one commissioned by the EU’s political leaders, the heads of state and government, called the Draghi report – after its author, former ECB President and former Italian Prime Minister Mario Draghi.
The chair of the House Financial Services Committee French Hill, an Arkansas Republican, was on business channel CNBC yesterday pointing to the Draghi report and urging the EU to grasp the opportunities for change contained within it.
Maybe the Trump tariffs could act as a catalyst for the EU to make changes it knows have to be made, but which may come with a political price at home.
However, if the price of not making those changes is bigger – like 50% bigger – and more immediate, like June first immediate – then maybe Donald Trump will be doing the Europeans a favour by forcing them to act. After all, a higher EU growth rate would produce the money needed to buy more high cost goods made in the US.
To recycle founding father Jean Monnet’s evergreen quip, “Europe will be forged in crisis, and will be the sum of the solutions adopted for those crises.” Or to translate for our American readers, the sometimes confusing way the EU works is a feature, not a bug.
