Europe Is the New Front in Trump’s Trade War

With a rejigged NAFTA passed by Congress and a mini trade deal with China in the books, the Trump administration is now planning to turn its trade bazooka on a familiar target: Europe.

Indeed, U.S. President Donald Trump already kicked off the latest chapter at the World Economic Forum this week in Davos, Switzerland, where he followed a “friendly” chat with European Commission President Ursula von der Leyen by again threatening to levy huge tariffs on European cars if the two sides can’t reach a trade agreement soon. That was followed by further threats by U.S. Treasury Secretary Steven Mnuchin to use the auto tariffs to punish European countries that tax American digital firms, further clouding the prospects for trade peace just days after France tendered an olive branch in the contentious fight over global tax rules.

Trump’s discordant performance in Davos, where he took his “America First” economic message to the very epicenter of the internationalist set, highlights the difficulties Europe will face this year in taming Trump’s unilateralist and protectionist instincts. While Europeans were quietly celebrating what seemed to them the rebirth of a multilateral approach to trade disputes—a little-noticed agreement this month with the United States and Japan to tackle industrial subsidies—Trump again railed against an international trade order he thinks is stacked against him and that he is steadily dismantling.

On Wednesday, Trump declared that the United States is a “developing nation,” in need of the same preferential treatment under World Trade Organization rules as China and India, and called for a massive reform of the quarter-century-old trading organization. And he again took aim at Europe’s alleged trade abuses, describing the European Union as a worse offender than China.

After three years of steady, but still limited U.S. trade attacks on Europe—tariffs on steel and a host of other products, and a long-simmering fight over Europe’s support for Airbus—the EU is bracing this year to receive the full brunt of Trump’s trade anger.

“The European Union tried to gain some time, and had Washington focused on Beijing, but now we are on the menu ahead of the presidential election,” said Elvire Fabry, a trade expert at the Institut Jacques Delors in Paris. “Trump will expect to have some new scalps to show from the European side.”

Trump may be emboldened by his relative success in browbeating Canada and Mexico to renegotiate parts of the North American Free Trade Agreement, and by his use of tariffs to force China to repeat some promises of reform and promise to buy more U.S. goods. But there are several important differences between Trump’s previous trade fights and the looming showdown with Europe—above and beyond the fact that the EU for decades has been a U.S. ally, not a rising strategic competitor like China.

First, China’s longtime, egregious abuse of economic levers including state-owned firms, industrial subsidies, theft of intellectual property, and forced technology transfer was never much in doubt and in fact generated bipartisan agreement in Washington on the need to confront Beijing. Even at the height of Trump’s trade war with China, for example, Democratic presidential candidates vied among themselves to see who could be tougher on China; few turned a blind eye to the country’s well-documented abuses.

That’s not the case with Europe, where Trump’s invocation of a specious national security excuse to slap the EU with tariffs on steel and aluminum in 2018 met with protest among all mainstream economists and from both sides of the political aisle. While it’s true that some European trade policies have long rankled successive U.S. administrations—including state support for the aerospace giant Airbus and a doggedly closed agricultural market and some remaining tariff barriers—Europe, despite the administration’s reiterated protestations, has never been a worse trade offender than China. (And those trade irritants work both ways: Boeing, too, enjoys state support, and Europeans are uncomfortable with U.S. efforts to force the rest of the world to swallow genetically modified foods and a hands-off approach to regulation.)

Those fundamental differences determine the tools that the United States can use in its trade fights with Europe. While the trade war with China was predicated on a so-called Section 301 investigation, which highlighted real and systemic problems in the Chinese economy, Trump’s war with Europe is predicated on fabricated national security grounds that likely have little standing under international trade law. (U.S. measures are still awaiting their day in trade court.)

Trump’s steel and aluminum tariffs, and, more importantly, his threat to slap all auto imports with tariffs, are all based on the argument that buying steel pipes or sports cars from NATO allies represents a grave security threat to the United States. Of course, in the case of auto imports, it’s impossible to know what the Trump administration actually determined in the course of a so-called Section 232 investigation. The Commerce Department has refused to share the findings with Congress or the public, even though it is mandated to do so by law; the Justice Department, meanwhile, is so scared the findings could be made public it has kept them classified. Additionally, the lack of U.S. action on auto tariffs in the months after the conclusion of the investigation means the window has closed and that the measures cannot now be implemented, at least legally.

One potential problem for the Trump administration’s showdown with Europe is that while tariffs seemed to work to get China to make some concessions, it was a viable approach because the duties did only moderate harm to most sectors of the U.S. economy, mainly small businesses (and farmers caught in the crossfire), while consumers emerged largely unscathed. Putting 25 percent tariffs on imports of European autos and auto parts, on the other hand, would cause immense and immediate pain for U.S. manufacturers and consumers, destroying hundreds of thousands of jobs and raising the cost of new cars by thousands of dollars.

That’s why many in Europe figure Trump has just one real arrow in his quiver, and it’s unlikely he’ll use it, as it would hurt the United States as much or more than Europe.

“Trump’s main weapon are the auto tariffs,” Fabry said. But the auto tariffs would have such an immediate spillover effect on important sectors like autoworkers that, seen from Europe, they aren’t as credible a threat as Trump’s tariffs on China. “The impact would be so huge on everybody, I don’t think that Trump can manage that cost ahead of the election.”

That’s why, despite the theatrics this week in Davos and the ever-present threat of new Trump tariffs, there is some optimism in Europe about reaching a trade accommodation with the United States. The new EU trade commissioner, Phil Hogan, struck a conciliatory tone in his visit to Washington last week. On Monday, French President Emmanuel Macron agreed to pause the new French digital tax while both sides look for a solution—avoiding another round of painful U.S. tariffs. And von der Leyen on Wednesday again suggested that the framework for a limited trade agreement, focused on industrial tariffs and energy trade, could be wrapped up in a matter of weeks.

“If we want to move on industrial tariffs, we can go quickly—that was the most advanced chapter” of the now-moribund Transatlantic Trade and Investment Partnership, an Obama administration-era free-trade deal with the European Union, Fabry said. Coupled with some rhetorical concessions from Hogan on agricultural regulation, “the signal from Brussels is that it is ready for negotiations,” she said.

That doesn’t mean an end to trade tensions with the United States. Beyond Trump’s need for some sort of victory ahead of this fall’s elections, the newly inked China deal still has to play out. If Trump sees that he needs international cooperation to goad China into making more substantive reforms, that could open the door to more cooperation with Europe, like the recent three-way accord on industrial subsidies. But if Trump pockets the Chinese promises of commodity purchases and limited reforms while turning his sights toward a new bogeyman, it could spell a turbulent year.

“There will definitely still be tensions on the trans-Atlantic side,” Fabry said. “We don’t expect a very smooth process in the spring.”