The EU’s tariff negotiations with Donald Trump have been their toughest in living memory. For one the goalposts are constantly moving. Two days ago Trump wrong-footed the EU with a 30% duty on all EU exports on 1 August. The week before it was 20%. Before that it was 17% on all food. Tomorrow will he threaten 200%?
EU-US trade negotiations
It is difficult to negotiate with a jellyfish. The only predictable thing about Trump is his conscious unpredictability.
For two, the EU is negotiating with a gun against its head – imposition of swingeing tariffs on 1 August unless a deal is reached that meets so far undefined US (forget EU) objectives. And three, the EU is divided.
Between those like Spain and France who want to call Trump’s bluff (is it a real gun or just a water pistol?), refuse to kowtow to ‘the Emperor’ and hit hard with retaliatory measures if negotiations falter in the days ahead; and those – notably Germany, Italy, Ireland, Hungary – who will close their eyes to Trump’s clearly illegal tariffs if they can get sectoral carve outs for key sectors like automobiles, steel, pharmaceuticals, aerospace, or wines and spirits.
As we write, EU trade ministers are meeting in Brussels to decide which way to move, but it seems certain that the EU will postpone again its imposition of retaliatory tariffs – due to enter into force this week – until 1 August to give negotiations a last chance.
This may ironically only confirm Trump’s conviction that the EU buckles under threat – unlike China – and embolden him further.
The US is also not slow to exploit this division amongst EU members.
That quick and dirty UK deal
It is buoyed by the quick and dirty deal done with the UK which sets the template for other agreements: a 10% tariff (only!) stays in place, a few sectoral deals – autos, beef, ethanol and so on.
An aside here: with this agreement, the UK not only condones Trump’s illegal tariffs (it is forbidden under WTO rules to raise your tariffs or treat different countries differently), the UK itself also breaches WTO in giving the US preferential access for beef.
Such insouciant dismissal of its international obligations makes the UK’s claim, in its freshly minted trade strategy, to be a champion of multilateralism look very threadbare. ‘Perfidious Albion’, one can imagine Emmanuel Macron thinking.
Four EU ‘red lines’ with Trump?
So what will be the EU’s red lines in a negotiation which will continue close to the 1 August deadline? I predict four based on my own experience as an EU trade negotiator.
One is that while the EU has no choice but to accept the permanence of a 10% illegal tariff, it will not accept a 30% tariff unless there are major carve-outs covering a lot of trade; and will retaliate in kind if this threat materialises.
Two. Because if it does not forge a unified position and retaliate, it is the end of the Common Commercial Policy. Macron realises this. Nor will the EU breach WTO law and give the US any preferential market access denied to other countries.
Three, the EU will demand exemptions – zero duties or duty-free quotas – for at least some of the key export sectors mentioned above. The US has already signalled better treatment for aerospace (think Airbus) and spirits. If autos and pharmaceuticals can be added, that could push a deal across the line. France is pushing for wines and cosmetics. The EU would save itself from the humiliating situation of having a deal with the US that is worse than the UK’s. Brexit benefits anyone?
And four, faced with an unreliable, aggressive, indeed some say psychopathic negotiating partner, the EU will resist pressure to choose between the US and China. Because, to paraphrase Princess Diana, there are three people in this relationship. The deals the US has so far inked – UK, Vietnam, and reportedly Cambodia – all require these countries to remove Chinese components from their supply chains.
In the UK case, for example, British steel exported to the US may not have been derived from Chinese iron, nor come from companies under Chinese ownership: a problem on both counts. In the case of Vietnam, apparel, car parts, electronics, etc, with significant Chinese input or value-added will attract higher tariffs.
China…and Ukraine
The EU will not accept this, given the high degree of EU-China trade interdependence in everything from electric cars to electronics to green tech. And with an EU-China summit later in July, on the 50th anniversary of EU-China diplomatic relations, and with a febrile international trade climate, both sides are keen to keep their markets open, manage any trade friction in a business-like way, and identify fields of cooperation, for example, the green transition.
What is less clear is whether the EU will accept any US demands to go easy on the big data platforms, either by relaxing the policing of content or waiving anti-competition penalties, both big asks of the US but which would require the EU to set aside the enforcement of their laws.
Where the EU is more vulnerable is with respect to Ukraine. American support for Ukraine has blown hot and cold since 20 January. The EU simply cannot afford a complete breakdown in trade relations and a trade war with the US – its second biggest market after the UK.
It could trigger a worldwide recession in which there are no winners, only losers. But more fundamentally, it might put the nail in the coffin of the US commitment to Ukraine. The US might turn its back more completely on security cooperation with Europe. Amidst any white smoke emanating from the White House, there should not be any negative impact on the US’s already wavering support for Ukraine’s existential battle.
So an unpleasant and very one-sided negotiation with the US. Trump does not negotiate win-win outcomes. His playbook has not changed since The Art of the Deal: I win, you lose, got that?
The EU is not used to negotiating with a mega bully in this manner and is only now, very late in the day, finding out that its standard approach of seeking compromise and mutual gains is mocked by the White House.
It’s Venus against Mars.
