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USA vs. EU. The specter of a trade war

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With the return of Donald Trump as president of the United States, the risk of a trade war between Brussels and Washington returns. “Europe must respond to possible tariffs firmly but carefully. Open capitulation would set a dangerous precedent,” said Charles Grant, director of the Center for European Reform, quoted by the Times.

“I have informed the European Union that they must make up their huge deficit with the United States by massive purchases of our oil and gas. Otherwise there will be DUTIES!!!” – Trump wrote in December in a post on the social media website Truth Social.

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Trade war concerns

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The deficit is indeed huge. In 2023, European Union countries exported goods worth EUR 502 billion to the US, and imports of goods from the US to the EU reached EUR 344 billion. As a result, the EU 27 recorded a trade surplus with the USA, which amounted to EUR 158 billion.

Everything indicates that if the US introduced 10-20 percent tariffs on imports from the EU, and then EU retaliatory tariffs, European countries would suffer greater losses. In this way, Trump wants to support domestic production, even if it is uncompetitive compared to foreign production.

The tariff announcements have stoked fears of a trade war in EU capitals. According to analysts, such a scenario is realistic. However, there are many voices in Brussels that tariffs and the trade war can be avoided, and Brussels' bargaining chip in talks with Trump may be another issue, e.g. the import of LNG, i.e. liquefied natural gas, to the EU.

– Trump uses the threat of tariffs to achieve other political goals. In case China it's about weakening the country's economy, in the event Canada and Mexico in turn – to limit the flow of immigrants or drug smuggling across the border. In the case of Europe Ukraine is one aspect of mutual relations, but there are also others where Trump wants concessions – Jacob F. Kirkegaard, an expert from the Brussels think tank Bruegel, told PAP.

United States are currently the largest supplier of LNG to the EU, just like crude oil. This import has increased in the last two years after Russia attacked Ukraine, and supplies of Russian energy resources to the EU were significantly limited.

Despite several EU sanctions packages imposed on the Kremlin, Russian LNG still reaches European terminals. Further restrictions on imports of natural gas in this form from Russia could open the door even wider for American companies exporting the raw material. This could convince Trump that it is not worth starting a trade war with the Old Continent.

The stakes are high, because EUR 502 billion of annual exports from the EU to the USA consist of, among others, machinery and electronic equipment, cars and car parts, pharmaceutical and chemical products and luxury goods. It also means millions of jobs in European industry and huge tax revenues for EU capitals.

The EU should be ready for the worst-case scenario

Although there is a chance for an agreement, experts agree that the EU should not wait for Trump's decisions, but be prepared for a negative scenario.

In the opinion of Bruegel's analysts, first of all, it should use diplomacy now and, in exchange for abandoning the introduction of tariffs, propose increasing LNG imports or purchasing military equipment. The EU could also reduce tariffs on car imports from the US.

However, apart from the carrot, you also need a stick. According to analysts, a “credible threat of retaliation” is necessary. European Commission should prepare a list of products imported from the US to the EU, which, as part of potential retaliatory actions, will be subject to the same tariffs – in the amount of 10 to 20 percent. However, imports from the US, on which the EU is largely dependent, should be excluded from this.

Secondly, the EU should maintain and strengthen a functioning trading system based on the rules of the World Trade Organization (WTO). This is because this organization can be consulted for arbitration in case of commercial disputes.

Finally, thirdly – according to experts – the EU should expand the network of trade agreements, in particular with Mercosur, Great Britain, Switzerland and in the Indo-Pacific and African regions.

“Open surrender would set a dangerous precedent.”

“Europe must respond firmly but carefully. Retaliatory tariffs could exacerbate tensions, but open capitulation would set a dangerous precedent,” said Charles Grant, director of the Center for European Reform, quoted by the Times.

Experts from the Center for Strategic and International Studies (CSIS) think tank also recommend that the EU prepare a strategic response to potential US tariffs, taking into account both diplomacy and possible retaliatory measures.

David Nelson, an analyst at this think tank, believes that the era of the most protectionist US trade policy in almost 100 years is coming.

Main photo source: Lynda McFaul / Shutterstock



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