Facing tariff threat, Europe eyes options to appease Trump

By Philip Blenkinsop

The European Union is considering options to appease Donald Trump on his return to the White House as it braces for a resumption of U.S. tariffs and other trade threats plus tough exchanges on how to treat China.

Trump warned shortly before his U.S. presidential victory that the 27-nation bloc will have to "pay a big price" for not buying enough American exports.

Brussels recognises that threats of 10% tariffs on all U.S. imports and 60% on those from China are credible, not just campaign rhetoric, EU officials say.

The European Commission has already begun modelling the impact on the bloc as a whole and on those nations likely to be hardest hit. They could include major car producer Germany and Italy, the second largest EU exporter to the United States.

Though cagey in public, some governments expressed anxiety in the lead-up to the election, EU diplomats say.

In addition to the direct hit to a sluggish EU economy from tariffs on its products, the EU could face a second blow as Chinese producers, effectively facing greater barriers to the U.S., may steer more exports to Europe.

In response to Trump's 2018 tariffs on EU steel, the EU put in place safeguard measures to limit imports of steel tariff-free to its markets. But these measures are due to expire in June 2026, with no extension possible under EU or WTO rules.

The EU will seek to contact the future Trump administration before his inauguration and is already mulling future areas of cooperation that could ease or even remove the tariff threat.

One possible field is liquefied natural gas (LNG), which the EU could import more of from the U.S. to ease the trade deficit that preoccupies Trump.

DOING BUSINESS WITH TRUMP

In 2018, Trump and then EU executive chief Jean-Claude Juncker agreed a deal that included an EU wish to import more U.S. LNG. It helped ward off fresh tariffs on EU goods beyond steel and aluminium. Brussels hopes Trump will prove a president it can do business with again.

Investments in the EU to diversify energy supply, particularly after Russia's invasion of Ukraine, could lead to increased LNG flows from the U.S., EU officials believe.

Some EU diplomats suggest China, on which U.S. policy is likely to toughen, could be another area of cooperation, although the EU wish to stick to global trade rules and "de-risk" but not de-couple from China will make discussions tough.

A Trump presidency has other major implications for Europe, which faces the long-term challenge of how to finance welfare spending for an ageing population during modest economic growth.

If Trump reduces support for the NATO military alliance and the Ukraine war, Europe's governments would have to fund increased defence spending from budgets already stretched by national debt levels close to 90% of output.

Trump's proposals, if enacted, will weigh on European growth and likely lower inflation, especially if manufacturers, already suffering through a lengthy industrial recession, start to curb workforces.

Increased imports from China could also weaken prices, while more U.S. oil drilling and coal production could add to deflationary pressures.

Trump's inflationary tariffs and higher budget deficit will likely strengthen the U.S. dollar, so the U.S. may export some of its own inflation, but that will not be enough to offset the other factors that weigh on prices.

This could force the European Central Bank to cut interest rates below 2% next year, where it will once again stimulate growth after several years of restrictive policies.