Global Trade War? The European Angle

Following up on his 2016 campaign threats, U.S. President Donald Trump has now stoked the worst trade tensions in decades. Understandably, markets are nervous.

In a highly interdependent world, economic logic is likely to largely prevail in the end. If China agrees to stronger protection of intellectual property rights and also grants somewhat better access to its vast market in exchange for the U.S. government not implementing punitive tariffs, global trade may even benefit once the dust has settled after a messy interlude.

Of course, the risk remains that the U.S. and China do not find a negotiated solution and implement tit-for-tat tariffs that go even beyond those that have been muted so far. If so, the impact on the global economy could be substantial.

But even in such a case, the damage should still not derail the global economic recovery for good as long as the disruptions remain largely confined to U.S.-Chinese trade.

The role of Europe

Europe will play a key role in that equation. When it comes to trade, the EU is a top global power that is able to act. External trade policies for the EU are largely a prerogative of the EU authorities in Brussels.

Of the three major global players, the United States, the EU and China, the EU is the one with the least pronounced political agenda and hence the highest probability of acting roughly in line with economic logic.

Where it gets really interesting is to look at the EU inside this triad from a Washington perspective. One insight is inescapable: The more the United States abstains from imposing new barriers to imports from the EU, the more may the EU support United States efforts to change Chinese practices regarding both intellectual property and market access.

At the same time, the U.S. government correctly points out that EU import tariffs are — on average — slightly higher than those of the United States, according to most calculations. However, the EU for its part can argue that it was Donald Trump who stopped the transatlantic free trade negotiations (TTIP). Under TTIP, the EU and the United States would have abolished almost all tariffs and many other trade impediments between each other.

The EU may well be ready to negotiate a mini-TTIP with the United States. That would allow President Trump to claim that he secured better U.S. access to the EU market, while the EU would benefit from some other U.S. trade concessions.

The EU is no pushover

That the EU is most likely to act roughly in line with economic logic does not mean that the EU would be a pushover for Trump in a serious trade dispute. In the most trade-dependent countries of core Europe such as Germany, the Netherlands and Belgium, labour markets are in robust shape. German GDP growth, for example, is constrained by a scarcity of suitable labour, not by a lack of export orders.

As a result, the EU would be ready to take on the U.S. government, if provoked – and even if that would incur some economic costs. But again, the EU responses would be designed to de-escalate rather than to exacerbate the situation.

The risk that U.S.-EU trade tensions spiral so much out of control that they could cause serious economic damage remains even much smaller than the risk that this may happen between the United States and China.