by Miceál O’Hurley
STRASSBOURG — The European Commission acted swiftly to assert their view that President Donald Trump’s proposed “reciprocal” trade policy announced this week was, as their communique of 14 February made clear, “a step in the wrong direction”. According to the statement, “The EU remains committed to an open and predictable global trading system that benefits all partners”. European Commission President Ursula von der Leyen released her own short, terse statement, “I deeply regret the US decision to impose tariffs on European steel and aluminum exports. Tariffs are taxes – bad for business, worse for consumers. Unjustified tariffs on the EU will not go unanswered—they will trigger firm and proportionate countermeasures. The EU will act to safeguard its economic interests. We will protect our workers, businesses and consumers“.
Since being sworn in to office only 3-weeks ago, Trump has unilaterally sought to change trade relations with its most robust long-term partners and employ tariffs to further his “culture war” public policy. Trump’s policies represent a stark departure from decades of US policy from both Republican and Democratic administrations. Trump wasted no time in using his Executive Authority to impose unilateral tariffs on Mexico and Canada, America’s greatest trading partners, despite the US teetering on the verge of escalating inflation. Trump stayed imposition of the tariffs after “concessions” by both nations within 24-hours. However, a careful analysis of the actions pledged by both Mexico and Canada seemingly indicate the steps pledged to ameliorate Trump’s concerns were indeed steps to which each country had already committed and were almost completely in train rendering Trump’s victory overwhelming one of perception than impacting real change. The whirlwind decision and suspension of the threat of tariffs have left the diplomatic world worried that the US is no longer a predictable nor reliable partner.
Trump’s newest threat of tariffs, this time against the EU, are at odds with decades of the US’ commitment to free trade principles. The Trump administration has signaled they see the VAT regime in use across the EU and by 177-nations worldwide tantamount to sanctions on the American people. An orthodox view of tax policy would indicate tariffs are a levy or tax on imports while VAT is a tax on goods wherever they are consumed, without distinction of the place of production origin. Conflating the two presents difficulties and multitudinous consequences, many unpredictable and contrary to Trump’s stated policy goals. His understanding of world markets, as indicated by his zeal to use tariffs so indiscriminately, without reference to other economic factors, reflects a rudimentary understanding of trade policy, economics and politics. With rising inflation in the US, and the Federal Reserve indicating it is in no rush to cut interest rates, Trump seems committed to alienating his MAGA base with what appears to be a worsening economy.
With some of the lowest tariffs in the world, the EU indicated its concern, but hardly its surprise at Trump’s announcement given the lack of traditional justification for his desire to impose tariffs on EU exports.
Tariffs, by their nature, are a species of targeted taxes. Trump seems to believe that by destroying America’s access to affordable imports it will provide the impetus for a domestic US manufacturing base will be resurrected. Taxing American goods would also provide the funding for Trump to offset his pledge to provide new tax cuts to the wealthy. Such an over-simplistic economic view ignores the complexity of world markets, access to raw materials, affordable labour, transportation and other critical supply chain and distribution considerations.
Trump, who built his business empire as the “King of Debt” and multiple failed businesses that still provided him substantial wealth despite their lack of viability and using US bankruptcy laws to enrich himself at the expense of his business partners and investors, enlarged the US deficit by some $7.8 trillion during his first 4-years in office. During his single administration, Trump increased the national debt by almost twice as the combined debt of Americans for student loans, credit cards, student loans and consumer credit lines and mortgages combined.
The Federal Reserve Bank of New York estimates that every man, woman and child in the United States acquired $23,500 in sovereign national debt because of Trump’s failed economic policies during his first term of office. If implemented, Trump’s tariff policies threaten to explode that figure and create economic chaos for America’s trading partners, especially EU countries.
In reality, without ready and competitive domestic production capacity and consumer will Trump’s tariffs will simply act as a tax on his own citizens. Economic data indicates that after his election in November 2024, American consumers began slowing their rate of purchase of consumer goods contrary to conventional wisdom that surmised an increase in purchases prior to the imposition of Trump tariffs. The slowing of spending, rising costs and with Trump poised to create tens-of-thousands of unemployed from the well-paid and pensioned federal workforce are all indications that Trump’s tariff and other policies will undermine American and world economic stability.
The resulting rising cost for consumers and businesses alike threaten to severely constrain grown and speed already rising inflation engineered by Trump in only weeks. As an economic instrument, tariffs tend to inject economic uncertainty into world markets, introducing concern by market investors and trigger global economic slowdowns by disrupting the efficiency and integration of global markets. Following Trump’s announcement he intends to impose tariffs on the EU, markets closed lower. The pan-European Stoxx 600 ended the session 0.93% lower, recovering from lows of 1.6% earlier in the day.
German automakers BMW and Volkswagen both reacted negatively to Trump’s threat to impose tariff’s “pretty soon”. According to BMW, “Free trade, which has always been a guiding principle for the BMW Group, is of immense importance worldwide: It is one of the most crucial drivers of growth and progress,” a spokesperson for BMW shared via email. “Tariffs, on the other hand, hinder free trade, slow down innovation, and set a negative spiral in motion. In the end, they are detrimental to customers, making products more expensive and less innovative.” Volkswagen stated “[We] are assessing any potential effects on the automotive industry and our company as a result of the announced tariffs in the U.S., Canada, and Mexico,” a spokesperson stated in emailed comments. “At the same time, we continue to promote open markets and stable trade relations. These are essential for a competitive economy and for the automotive industry in particular. We are counting on constructive talks between the trading partners to ensure planning security and economic stability and to avoid a trade conflict.” Both auto manufacturing companies shares closed down 4% and 5% respectively on Thursday, 13 February.
Politically, Trump’s imposition of a ‘Unitarian Executive’ model of unbridled power being invested in the Presidency, when the US Constitution provides that the Presidency’s executive powers be balanced as a co-equal in government with Congress and the Judiciary, has deeply shaken foreign capitals as much as it has global markets. Trump’s willingness to terminate long-standing institutions, fire the overseers of America’s weapons stockpiles before realising their role in arms control, safety and accountability and even refuse to be guided by Orders of US Federal Courts to constrain his rampage and vivisection of US agencies and departments that undergirded domestic and international programmes has sent shockwaves through the hearts of even the most stalwart of American allies. Trump’s dual exercise of American foreign policy without consulting partners such as those in Europe on issues directly related to their security, stability and well-being and his willingness to wield a “big stick” by unilateral economic actions such as imposing punishing tariffs has rendered the US an unreliable partner.
The rules-based, free trade deals that have flourished under a system of openness, fairness and binding agreements is now being up-ended by Trump without warning or consultation. Americans have been disproportionate beneficiaries of the largely zero-tariff goods produced and sold in Europe that they consume in mass quantities. These trade policies have been fundamental to the EU’s economic success as much as they have been to the US economy and its individual consumers.
If the EU responds in kind with ‘retaliatory tariffs’ both the US and Europe will be damaged at a time when Chinese trade already threatens robust Western markets incapable of competing fairly given China’s state-subsidies, low wages and mass distribution networks.
