One can say we find ourselves in a “phony trade war”.
While everyone waits for the action to start on the transatlantic trade beat since Donald Trump won the race to the White House for a second time last week, here’s some impressions I’ve been gathering of what people think and (not) say in the capital of the European Union about what promises to involve a rocky four years ahead.
Polite society waits for clues
When there is a transition in power and a very big politically sensitive issue hanging like a thundercloud above their heads, top civil servants and diplomats tend to go all silent in public.
When they do agree to speak at all and don’t refuse invitations to join a conference or to be interviewed by a journalist, it is in a cryptic way, deploying the art of saying nothing offensive to the powers-in-waiting, even in off-the-record and ‘Chatham House Rule’ settings.
Up to the listeners to deploy their own art of reading in between the lines.
We are in such a time in Brussels, where polite conversation feels very disconnected from the loud thunder appearing in the geopolitical sky.
Everyone in key bureaucratic positions is lying low while one senses the frenzy behind the scenes in offices in trying to figure out what to do when the expected trade war will finally start.
Future commissioners and executive vice-presidents of the commission in Brussels, in the process of being heard in parliament for their final confirmation in the job, have trodden very carefully on the subject of the United States.
They have all been emphasising a desire to cooperate on “common challenges” with the US but also signalling that “EU interests” will be defended.
The key security provider and political ally close to the heart and minds of European Atlanticists, and of leaders in Central and Eastern Europe sitting on the frontlines of the war in Ukraine, is proving a genuine challenge to world views and diplomatic habits that have been ingrained for decades.
This showed in Estonia’s former prime minister Kaja Kallas’ introductory remarks during her hearing to become foreign policy chief on Tuesday (12 November).
While Kallas frequently referred to Russia and China as the key security threats of the EU alongside the situation in the Middle East, in relation to the United States, she merely said: “As with all partnerships, they must be built on what works best for both sides. This will not change. The EU and the United States are stronger and safer when we work together.”
Expected roughening up of EU-US relations
What most expect without saying it, is what an eloquent public trade policy analyst and commentator not constrained in his speech by a bureaucratic job, Dmitry Grozoubinski, put starkly this week among his followers on the LinkedIn social network.
“If Trump follows through with his plan to raise tariffs on everything from everywhere, countries will have to either live with them, plead, bargain and make concessions in hopes of an exemption, or retaliate to try and create enough leverage to secure one,” said Grozoubinski.
There is a general sense that we are no longer asking “if” but “when” and “how” Trump’s proposed new all-round tariffs of 10-20% will come – with 60% announced on China.
Many expect the administration to use these tariffs to extract trade concessions from partners with which the US has a trade deficit. And this includes most EU countries, not least the large economies Germany, France and Italy, but also not-so-small countries such as Poland.
“Trade and investment are likely to become significantly less predictable as tariffs are applied, removed, adjusted, and suspended in response to diplomacy, negotiations, lobbying and presidential whim. The very chaos trade rules were agreed to avoid,” Grozoubinski said.
Speaking at an event in the EU capital this week, a US diplomat pointed to the areas of potential future trade friction and issues on which there might be bargaining attempts coming from the US: the EU’s Green Deal and its digital regulatory agenda as enacted in 2019-2024.
“The breadth and scope of this regulatory agenda is quite substantial and will have profound implications for doing business in the EU in the years ahead,” the official said.
The official went on to list about twenty new pieces of legislation produced by Brussels in the last five years that the administration has been worried about. The cited files range from the EU deforestation regulation to the new digital regulations such as the Digital Services Act to new renewable and non renewable energy.
“And for good measure, geographical indications on wine, cheeses, food products, and also craft products,” the official added.
The ‘gun’ of the tariff truce March 2025 deadline
The official also said that the EU had only agreed to extend the period in which it suspended its retaliatory tariffs on the 2018 steel and aluminium tariffs to March 2025, whereas the US had extended the duty free quotas on these products offered to the EU in the Biden era to the end of 2025.
In short, the EU already has a “gun” it can point at the US if it feels threatened. March 2025 would also be a mere nine weeks into the new Trump administration.
The expectation is however that the US will be even rougher than under the first Trump administration in 2017-2020 on the EU. It is expected to link its request for resolution of its economic and regulatory grievances to the US security umbrella at a time of war in Ukraine. Given Trump’s own and his entourage’s conflicting business interests, there is “an expected surge of corrupt foreign policy practices”, as US political scientist Daniel Drezner put it in a piece in Foreign Affairs magazine.
The Trump win on the other side of the Atlantic is focusing minds on the EU’s new ‘economic security’ drive as it faces the continued challenge of China, Russia and a Trumpian United States.
Optimists believe EU-US cooperation on issues of common concern such as non market economy practices – aka China – or security might not be impossible with the new Trump administration. On the record at least, the EU hopes that the Trade and Technology Council established in the Biden era will continue to exist.
The above mentioned US diplomat for his part said “I think I think there will be a lot of room for continued discussion” on a range of TTC related topics.
Despite its low level of tangible output, the talk shop established in 2021 and which last met in April this year, has helped the two sides better coordinate action on semiconductor subsidies and sanctions and export controls related to Russia.
Trade deflection fears
The EU also fears deflection of trade from places such as China to the EU market due to the US’ expected extra tariffs on that country. How much such trade deflection could actually occur in practice is somewhat controversial among economists, but the risk is generally perceived as real.
This could lead the EU to impose more import safeguards on a range of products in future. So far the EU has shied away from imposing and managing safeguards.
The steel safeguard introduced in the wake of the 2018 Section 232 Trump tariffs was an exceptional development. The safeguard is set to lapse in 2026 but officials are already indicating that some form of replacement will be found.
“We have been confronted with these issues in the past, in the steel and aluminium case, when the Section 232 measures were imposed, that led us to take an action through the safeguard instrument,” said a top EU official when asked about the deflection risk under Trump 2.
“So we have tools to deal with these kinds of risks of sudden trade diversion”.
Trade defence lawyers are not unsurprisingly expecting there will be a lot of business for them in the coming years.
All eyes on the new EU anti-coercion instrument
What many analysts are looking out for is what happens if the United States is seen as yielding its trade weapons once again to try to extract policy concessions.
Many point out that the idea of the instrument emerged out of the first Trump administration initiation of Section 301 investigations into EU and individual member state planned digital services taxes.
While enacted in practice in the Biden era, the ACI was seen under the lens of China. A sudden halt of Lithuanian exports to China in the aftermath of Vilnius allowing Taiwan to open an office there in 2022 jolted capitals into agreeing to the new “instrument” – as this piece of legislation is called.
The legislation allows the EU, on the basis of qualified majority agreement of member states on the fact that they or one of their own have been coerced, to enact potentially sweeping retaliatory trade measures. Beyond tariffs, these may include rescinding intellectual property right protections, procurement contracts and sanitary and phytosanitary approvals.
What is different from the first Trump era, however, is the political reality in the EU, with far-right and Eurosceptic parties in power or close to it in many member states and one third of the European Parliament hailing from such parties. A Trumpian United States, Russia and China could all act in ways to boost those centrifugal forces in Council.
Alternatively, we might well see the EU witnessing yet another jolt. ‘Emergency Europe’ might continue to deliver new feats of unexpected, improvised but irreversible steps to hold the existentially threatened bloc together. And this time round it might happen less in the trade policy field but more on the defence front.
The jury is still out on all this. So EU-watchers may well bring on the popcorn.
