It will take years before their commitments to increase their own defence spending might wean them off their reliance on the US for protection from an aggressively expansionist Russia.
However, with Trump also announcing at the weekend that he is considering raising the baseline tariff rate to 15 to 20 per cent, they have to take his threat of a 30 per cent tariff – and additional tariffs to match any retaliatory measures they might take – seriously.
Trump appears impatient that he hasn’t delivered the “90 deals in 90 days” the administration boasted it would deliver, let alone the 200 deals he once said were virtually done.
European Commission President Ursula von der Leyen. EU and US trade officials have been negotiating for months.Credit: Bloomberg
He’s also been boosted by the successful passage through Congress of his One Big Beautiful Bill Act and by the buoyancy of US financial markets, which have rebounded from their sell-offs in April, when Trump first unveiled his “reciprocal” tariffs.
In April, he deferred imposition of the tariffs until July (and subsequently deferred them again until next month) because the bond market was “getting a little queasy.”
Now markets have settled, with the sharemarket posting record highs. That may be because investors don’t believe he will follow through with the reciprocal tariffs he has threatened – the “Trump Always Chickens Out” or TACO trade – or because any ill effects from tariffs, most notably increased inflation, have yet to show up in economic data.
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No one, including Trump himself, it seems, knows what he might post next on his Truth Social, so markets are behaving as if nothing has happened until something actually happens. August 1 – the new deadline for his reciprocal tariffs – could be a wake-up moment for markets.
The apparent complacency in markets, in the meantime, is encouraging Trump to be more aggressive and more impatient.
There is a risk that, rather than heed, as he has until now, the urgings of calmer voices in his cabinet to negotiate deals, he will follow his personal preference and unilaterally present trade partners with “take it or leave it” ultimatums.
While the EU still appears to believe that Trump’s latest threat is a negotiating ploy, they have prepared countermeasures in case it isn’t.
The EU had drawn up a list of US exports that it could target in response to the baseline tariff and the sectoral tariffs on steel, aluminium and autos, covering about €21 billion ($37 billion) of US exports. Items on that list included chicken, motorcycles and clothing.
It has another list, targeting another €72 billion of products, ranging from aircraft to alcohol, with which it could respond to Trump’s reciprocal tariffs. It also has what it calls its “anti-coercion instrument,” or actions that could hit the trade in services, although it is reluctant to deploy that instrument, which it devised in response to a deluge of cheap imports from China.
The total trade between the US and EU is worth about $US1 trillion ($1.5 trillion), with the EU enjoying a trade surplus in goods of $US235 billion, but a trade deficit in services of about $US75 billion.
The EU, in its negotiations with the US, had sought exemptions from Trump’s tariffs for key sectors, such as aircraft and alcohol, in exchange for a promise to buy more US goods, particularly weapons and LNG, that would narrow the US goods trade deficit.
Von der Leyen said on Saturday that the EU was ready to continue negotiating but prepared to consider retaliation. Imposing 30 per cent tariffs on EU exports would disrupt essential transatlantic supply chains, harming businesses and consumers on both sides of the Atlantic, she said.
The dilemma for the EU is that Trump’s view of its non-tariff policies and trade barriers includes its value-added tax and its regulation of digital activity to protect competition and consumers. No nation state – or, in the EU’s case, collection of 27 nation states – would surrender its sovereignty and allow Trump to dictate its domestic policy settings.
Having seen what Trump has done to Brazil, threatening a 50 per cent tariff rate in response to unfair trade barriers (even though the US has a trade surplus with Brazil) and its trial of former president Jair Bolsonaro – an enthusiastic Trump supporter – for allegedly plotting a coup, the EU would be conscious of the risk that Trump’s demands may not be confined to its goods trade.
The potential for a trade confrontation is, therefore, quite significant. The EU will have to decide whether it should roll over and accede to Trump’s demands, damaging its industries and the sovereignty of its states.
Alternatively, it could emulate China and allow the confrontation to escalate to the point where it threatens a trade embargo, which would, as China’s tot-for-tat tariffs did, scare the bejesus out of financial market participants and unnerve the White House.
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Trump’s indiscriminate threats of trade sanctions against America’s friends and foes alike have ignited a scramble by the EU and others to secure new markets. There is potential for a new trading bloc, spanning Europe, the non-Chinese Asia Pacific and Latin America, to emerge.
Trump and much of his hand-picked cabinet are protectionists and isolationists. At the conclusion of his trade wars on everyone, if much of the rest of the world decides to trade freely among themselves, he might get what he wished for.
