As Bruegel says in its analysis, the first choice has the advantage of having the lowest financial costs if things stop there.
The European Union is preparing its response to Donald Trump’s duties, which will cause 750 billion euros in damage to the Union in the next four years according to the German Economic Institute (IW).
Trump’s 20% duties in the EU will affect 70% of its exports to the US estimated by the Commission with Brussels – although they maintain the main objective of continuing the negotiations – ready to respond to the most extensive attack on free trade since the 1930s.
EU options
According to the Bruegel thinking tank three are EU options as it weighs its countermeasures:
Do not retaliate and pursue negotiations with the White House reductions and exceptions, perhaps trying to limit the impact of Trump’s new measures through monetary policy.
To respond with targeted measures, such as those taken by the Commission by reacting to 25% steel and aluminum duties imposed by the US president before April 2 with the aim of hurting the production of Republican states and companies.
To put in effect proportionate countermeasures for most imported American products while activating the EU economic blackmail tool, which is a framework for the escalation of the Union’s reaction to outside financial pressure.
The pros and cons of each choice
As Bruegel says in its analysis, the first choice has the advantage of having the lowest financial costs if things stop there. But it is very likely that the White House will be construed as a sign of capitulation, pushing the Trump government to seek references by the EU, not only because it would have achieved a victory without resistance, but also because any new European investments in the US to avoid duties. In practice, this means that the EU will face endless trade wars.
But also the targeted measures of the second choice will probably be perceived as a sign of the EU’s weakness and fear of a trade war. In this case, it would be enough for Trump to respond with a strong, but waiting for escalation to force the EU to go back. This had happened to European duties in American whiskey when the US threatened to impose 200% of European alcohol duties. Whatever the case, the thought tank says, targeted measures are not the ideal solution, since either the EU will withdraw its duties and return to the first choice, or move to Tuesday.
If the EU comes to this solution, retaliation should be proportionate and adaptable (upwards and down_ and could also include services. EU duties would have a direct and high cost for everyone, but could gradually be effective in order for importers to find time to find. Products and raw materials, which are difficult to replace) to limit the costs for European businesses and consumers.
The impact of other countries’ counterparts on the US economy
As other countries are being prepared to follow the example of China, which responded with 34% of US products to those Trump’s products, the impact on the US economy may be important, especially at a time when the favorable economic environment inherited by the new US has disappeared in just two months.
The shrinkage of US exports, the negative impact of duties on investor and consumers’ confidence and new dives of the Wall Street Stock Exchange could push the US economy to slow down, as the Fed warns, or even a recession. And even if Trump is not currently willing to go back, his popularity in economy management is at the lowest point and, in fear of further plunging, may be exiled into real negotiations.
Why the EU should respond hard to Trump’s duties
“It may be based on the argument that a trade war with the US should be avoided, but Trump has already begun and the real question is whether Europe should be handed over by looking forward to the unlikely goodness of the winner (and validating his contempt for the weak and unnecessary). The actual search for a solution to the trade war, “Bruegel notes in his analysis.
And he concludes: “leaning the fog before a tyrant is more likely to encourage him to ask for more. Therefore, if the goal is to finish as soon as possible of a devastating financial conflict, the EU should risk responding in the same way to the aggression of US duties. “
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