Europe is laying low but must prepare for conflict with Trump

Cecilia Malström, PIIE, 3 de febrero de 2025

A sigh of relief went through Europe when President Donald Trump left the continent out of his inaugural speech. But European leaders remain apprehensive over Trump’s potential plans for tariffs, his wavering support for Ukraine, and his ambitions to “take” Greenland, widely understood as a threat against Denmark, a NATO ally.

The European Union is laying low for the moment, which is probably wise. But experiences from the trade tensions during President Trump´s first term bring important lessons. To prepare for what might be coming, the EU must be ready to retaliate against US tariffs with its own tariffs and other instruments if needed. But Europe should also signal a readiness to discuss and see what possible deals can be made.

Even if there is no trade war with the US, the EU should continue concluding trade deals with other partners and diversify its network of allies. Most importantly, however, Europe must use the potential for transatlantic tensions to get its act together and start working on necessary internal market reforms and boost European innovation and competitiveness. A stronger economy is the best way to foster resilience at a time of global instability.

LESSONS FROM THE FIRST US-EU TRADE WAR

The trade relationship with the EU during Trump’s first term was marked by tariffs on steel and aluminum imports from Europe, on the grounds that they posed a national security threat. The administration imposed tariffs of 25 percent on steel and 10 percent on aluminum on the EU and other allies, such as Norway, Turkey, Brazil, and South Korea, among others. All these countries took the issue to the World Trade Organization (WTO), and eventually the EU also decided on retaliatory tariffs on $2.8 billion worth of US imports that included orange juice, peanut butter, Harley Davidson bikes, and whiskey from Tennessee.

The US later threatened new tariffs on German cars and French wine. Tensions across the Atlantic led to an effort to defuse the trade war in July 2019, when Trump met with European Commission president Jean-Claude Juncker at the White House and a small deal was made. The EU agreed to import more US-produced liquefied natural gas (LNG) and soya and to cooperate at the WTO on ending some of China´s nonmarket practices. Later a micro deal eliminating tariffs on US lobster and seafood was also agreed. No additional American tariffs were imposed on Europe.

The tariffs on steel and aluminum remained in force after Trump left office. They had been criticized by Joseph R. Biden Jr. in his presidential campaign, but once in the White House, he did not rescind them. Instead, US and EU negotiators transformed them into agreed upon quotas limiting steel and aluminum imports from Europe. In return the EU suspended its tariffs on US goods. Both sides sought to get a global deal on more sustainable steel in the GASSA (Global Agreement on Sustainable Steel and Aluminum) format. However, an agreement was never concluded.

The suspended EU tariffs will re-enter into force automatically at the end of March 2025 unless the European Commission makes a new decision on them. They could come in handy if Europe needs to retaliate against Trump's actions, or they could be suspended again as part of a deal.

PLANNING FOR ANOTHER TRADE WAR WITH TRUMP

The EU must be ready to retaliate if needed in the new Trump administration. The suspended tariffs from 2018 could be revived, and there are other trade instruments that Europe could use, such as the anti-coercion tool, which allows Europe to retaliate against attempts to coerce one of its members, as well as the International Procurement Instrument, enabling Europe to favor domestic products in government procurement programs. The Commission president last week announce a possible new “Buy European” proposal to grant European preference in the public procurement for critical sectors.

Likewise, both EU commissioners and different ministers have signaled their willingness to sit down with Trump, exploiting his reputation for making deals. Even so, there will probably be many different topics on the table – tariffs, the ask to buy more American oil and gas, possible increased military contributions within NATO, and the EU’s digital laws and platform regulations opposed by American tech companies.

Looking beyond Trump, the EU should continue engaging with other partners, as it did in the first Trump presidency, concluding free trade agreements with Japan, Canada, Singapore, Vietnam, and some countries in Central America and Southern Africa. A tentative trade agreement between the EU and the four countries of Mercosur—Argentina, Brazil, Paraguay, and Uruguay—was reached five years ago but not ratified because of concerns in France and among some European countries over forest protection, notably in the Amazon rain forest. However, just before Christmas this past year, negotiators hammered out some final amendments, and ratification seems ready, pending translation and legal scrubbing.

Also, earlier in January 2025, the EU and Mexico concluded a new free trade agreement aimed at increasing mutual trade, and the European Commission relaunched stalled negotiations with Malaysia. Negotiations with Indonesia are expected to be concluded later this year, which should be followed by resuming talks with Australia, launching negotiations with Taiwan on an investment agreement and, ideally, Europe joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). A vast network of friends and allies is exactly what is needed.

WINDOW OF OPPORTUNITY FOR EUROPEAN REFORMS

The economic integration of countries in Europe has traditionally developed under internal and external pressure. The euro crisis, the migration crisis, the COVID-19 pandemic, and the Russian invasion of Ukraine have all forced Europe to act quickly and in sometimes unorthodox ways to expand cooperation. The current global turbulence, driven in part by the threat of tariffs and the erosion of a global world order, could be a catalyst for Europe to implement bold reforms, particularly in the areas of innovation and competitiveness. Two important reports last year by former Italian prime ministers, the Draghi report and the Letta report, proposed several steps to boost the internal market, simplify rules, and encourage business growth. The European Commission is preparing legislative proposals based on these reports. Commission president Ursula von der Leyen has announced a Competitiveness Compass, to be presented shortly, and a New Industrial Clean Deal, aimed at reconciling the climate agenda with competitiveness and social considerations. Von der Leyen’s proposed Omnibus Simplification Package is designed to simplify reporting requirements in several areas, a response to widespread complaints that climate laws are too bureaucratic and cumbersome. Also, politicians from the center-right European People's Party Group (EPP) in the European Parliament, as well as leading politicians from France and Germany, have urged the Commission to take a regulatory break and prioritize simplification and implementation.

The transatlantic relationship is an important one, but there are other actors in the world as well. The best line of defense for the European Union is a stronger economy that can generate its own growth to a larger extent. This could be Europe’s moment if it finally does its homework.