Europe in the line of fire as Trump threatens trade war with China

BRUSSELS — Forget about Donald Trump’s tariffs against the EU. What terrifies Brussels are the tariffs he is threatening against China.

The U.S. president-elect campaigned on a pledge to impose tariffs of 10 to 20 percent on all imports — and singled out China for punitive rates of 60 percent. He warned of a further 10 percent last week if Beijing fails to stanch the flow of fentanyl into the United States. And days later he upped the ante against China and its BRICS allies by brandishing a 100 percent tariff if they abandon the U.S. dollar.

Although those punches have, for now, been aimed squarely at Beijing, Brussels is coming to realize that it may need to get on board with Trump’s looming trade war against China. The fear is that a flood of Chinese exports would be pushed to Europe by an insurmountable U.S. tariff wall.

“The number one issue is not NATO, not even Ukraine, as serious as that is. The number one issue is the displacement of Chinese exports that are going to the U.S. and will now go to Europe,” said Anthony Gardner, who served as U.S. ambassador to the European Union just before Trump’s first mandate.

“There probably will be a significant displacement effect at an incredibly fragile time, where many industries are barely scraping by. That will have enormous consequences, potentially promoting deindustrialization and populist parties, a drift to the right as these people search for answers, often extreme answers to their questions. This is very real and it could happen pretty quickly.”

Governments worry too that the EU will be squeezed between the Big Two geopolitical heavyweights, Beijing and Washington.  

“We don’t have the luxury of only looking at the immediate impact of U.S. tariffs on EU goods. The ripple effect of changing trade flows as a result of U.S. tariffs on China might come crashing down on us sooner than we’d like,” said one EU diplomat, who was granted anonymity to discuss how Trump’s tariff threats were playing in Brussels.

Europe’s concerns are justified … up to a point. EU countries would indeed feel the heat of a trade war with China, which would depress trade and growth at a time when Germany, its largest and most export-driven economy, is expected to suffer its second year of negative growth.

Yet, according to the Kiel Institute for the World Economy, Europe would actually be hit less hard than other regions. Gross domestic product would fall by 0.14 percent in the first year of a Trump trade war, and by 0.2 percent in the longer term, the think tank estimates — far less than the decline that the two main antagonists would suffer.

(Trade) war — what is it good for?

Trump’s threats will likely force the EU to make a difficult choice between placating Washington and sustaining its difficult but lucrative economic relationship with China — the largest market for many of its exporters.

And calibrating that response will be a challenge, particularly as the shape that the Trump administration is taking means that it could turn out to be less tough on trade than was initially feared.

Crucially, there is no place for Robert Lighthizer, his first-term U.S. trade negotiator and the ideologist of his bombastic brand of protectionism.

And, although Lighthizer acolyte Jamieson Greer, a China hawk, has won the nod to be Trump’s next trade representative, he will be outranked on trade policy strategy by designated Commerce Secretary Howard Lutnick. The Wall Street veteran views tariffs as a bargaining chip in trade negotiations — and not an end in themselves.

Still, “at the end of the day, Trump is going to be leading the tariffs anyways,” said Ignacio García Bercero, the point person on U.S. trade at the European Commision during Trump’s first term.

So far during the U.S. transition, Europe has avoided Trump’s wrath. And, while that could all change with a single post on his Truth Social network, that could indicate that the current transatlantic standoff will resolve into a constructive discussion on how to deal with China.

“The U.S. and the EU have not been 100 percent in agreement in the past on all aspects of our relations with China, and this has historically led to a certain lack of trust,” said Dan Mullaney, a former assistant U.S. trade representative under Trump and other presidents. 

“But there is a huge overlap of interests between us when it comes to non-market economy policies and practices, and it will be important to build an alliance around those interests,” added Mullaney, now at the Atlantic Council.

Style and substance

So far, Brussels has tried to take a measured approach to the EU’s own yawning trade deficit with China — for instance by imposing moderate import duties of up to 35 percent on imports of Made-in-China electric vehicles after an investigation found evidence of pervasive state subsidies to its manufacturers. 

The Joe Biden administration has already hit Chinese EVs with duties of 100 percent. 

Trump will want the EU to be ready to take an even tougher line on China right after his inauguration on Jan. 20. But Washington and Brussels have been there before — and there are big transatlantic differences on the best approach to take.

“The diversion of Chinese products into the EU market will make things tense between Brussels and Washington. The Trump administration, like the Biden administration, will expect the EU to respond to China’s export driven economic policies in a similar way as the United States,” said Keith Rockwell, a former WTO chief spokesman who is now a senior research fellow at the Hinrich Foundation think tank.

After the EU and the U.S. tried to solve a trade dispute over steel and aluminum ignited by Trump in his first term, Brussels and Washington tried to join forces and tackle China’s steel overproduction along the way. 

The U.S. pitched a green metals club protected by tariffs on Chinese steel and aluminum — but Brussels didn’t jump, worried it would breach global trade rules. The EU and U.S. have declared a ceasefire, suspending their duties. But the EU’s retaliatory duties are due to reenter force at the end of March — within weeks of Trump taking office.

Aligning more closely with the U.S. on China would be possible, but the EU would take a different approach than Trump — resorting to established trade defense instruments rather than arbitrary action. 

“If there’s a willingness to align more closely on how to deal with Chinese overcapacity, each side will be doing it its own way. In the EU, we will mostly focus on trade defense, including more safeguards,” García Bercero said.