You’d think Donald Trump had enough on his plate, trying to find an exit path from his war on Iran that isn’t humiliating. Somehow, however, he’s found the time and energy to revive an old favourite, his trade war with the European Union.
Last week Trump – in a social media post, naturally – announced he would increase tariffs on European cars from 15 per cent to 25 per cent this week, claiming the EU wasn’t complying with the terms of the trade deal the US and EU agreed last year.
That deal hasn’t yet been ratified by the EU, although it is on track to be finalised in June. Indeed, there was a meeting of European lawmakers this week with the European Commission and European Council to dot the I’s and cross the T’s on the legislation that would implement the agreement.
Trump’s threat came out of the blue and has been labelled by the head of the European Parliament’s trade committee, Bernd Lange, as unacceptable and a development that demonstrates how unreliable the US is.
The Europeans appear to suspect that Trump’s threat has more to do with the deterioration in the wider relationship with the administration than the slow progress they have made in ratifying the trade deal.
Trump has been angered by the failure of NATO and Europe to play a role in the war in the Middle East – a war the US and Israel launched without any consultation or any forewarning of its allies.
More recently, he was incensed – and has threatened to withdraw 5000 US troops from Germany – after its chancellor, Friedrich Merz, said (accurately, but ill-advisedly) that America was being “humiliated” in the war with Iran. Trump would know that Germany’s auto industry would be hit hardest by any increase in US tariffs on European cars and trucks.
The Europeans are among those energy import-dependent economies that are being throttled by the war, the closure of the Strait of Hormuz and the consequent surges in oil and gas prices.
The war is reigniting inflation and lowering economic growth worldwide. The EU is particularly exposed, having only just weaned itself off its overdependence on Russian oil and gas.
With its growth forecasts already slashed, another hit on the economic front – one triggered by its biggest trading partner, targeting one of its most significant industries – would be highly destructive.
The deal struck last year was always going to take considerable time to be finalised. It was just a framework for an eventual deal with some agreed headings, but a lot of blank pages to be filled in through detailed and time-consuming negotiations.
Moreover, the structure of the EU wasn’t designed for speedy decision-making. Once a detailed agreement has been agreed, it has to be ratified, not just by the European parliament, but by the individual parliaments of the EU’s 27 member states.
Even in less cumbersome environments, comprehensive trade deals can take years to thrash out. The EU-US deal was never going to be bedded down in months.
The Trump administration hasn’t helped. Progress in the negotiations stalled when Trump repeatedly threatened to annex Greenland and used the prospect of punitive tariffs on a number of European economies if it weren’t handed over.
The talks hit another bump last year when the US – with the ink barely dry on the larger agreement – announced a broadening of its 50 per cent tariffs on steel and aluminium (two key EU export industries) to hundreds more products that include the metals.
After talks with the EU, some amendments were made to the tariffs earlier this year that had lifted the rate on some EU exports to the US from the 15 per cent envisaged by the wider trade deal to 50 per cent.
The EU has said the proposed changes, however, actually raised the effective rates for about half the affected products. The two sets of trade negotiators are still trying to sort that one out.
There was another pause in the EU processes in February, when the US Supreme Court struck out the key legislative platform for Trump’s “reciprocal” tariffs, which was the leverage Trump had used to force the EU into the trade deal.
The EU wanted to digest the implications of that decision, and the administration’s response to it (a scramble to cobble together a new tariff patchwork using different pieces of legislation) before finalising the agreement reached last year.
While the Europeans entered last year’s deal begrudgingly, they committed to it on the basis that it could have been worse. Under the deal most of their exports face a duty of 15 per cent, while exports of most US industrial goods to the EU, and some agricultural products, will enter duty-free.
The threat of new auto tariffs is a reminder that Trump decides policy unilaterally, on a whim. He is thin-skinned and vengeful if he believes he’s being defied or insulted.
He also can’t be trusted to abide by an agreement, as the Europeans would know by observing the plights of Canada and Mexico.
They reached what Trump described as “the most important trade deal ever” in 2020, when he forced a renegotiation of the North American Free Trade Agreement and its replacement (with some relatively modest changes) by the US-Mexico-Canada Agreement (USMCA).
The threat of new tariffs on the EU’s auto exports is a reminder that Trump sees the deals his team has negotiated as binding only on one party to the agreement, and that’s not the US.
Trump has, however, now imposed sectoral tariffs on his supposedly free-trade partners, used their supposed roles (which are immaterial) in fentanyl imports as a pretext for other tariffs and is planning to turn a routine review of the USMCA later this year into another fundamental renegotiation of its terms – even though there is another decade, and 10 more annual reviews to run, before the agreement can be terminated.
New and higher tariffs on European autos may just be another Trump bluff, like the continual threats he has been making that Iran will be “blown off the face of the Earth” if it continues to attack shipping in the Strait of Hormuz. It has, and he hasn’t.
The EU, which says the US hasn’t complied with its side of the agreement, is also making threats of its own if Trump continues to brandish tariffs at them, beyond those envisaged by the existing deal.
“We will use our tools, especially if there are too many threats on our economy or on our industrial, strategic interests,” French Trade Minister Nicolas Forissier said this week.
The EU prepared a list of retaliatory tariffs of its own last year and also considered deploying its “bazooka” or the “anti-coercion” instrument that would enable a range of measures from tariffs to restrictions on imports of services, bans from access to public procurement and suspension of intellectual property rights.
The economies, and companies, on both sides of the Atlantic would be damaged if there were a breakdown in the trade deal and a full-scale trade war erupted.
Other countries that have their own deals with the US will be monitoring the outcome of the renewed friction between Trump and the EU, mindful that the administration is rushing to put together a new legislative armoury to replace the one blown up by the Supreme Court.
The threat of new tariffs on the EU’s auto exports is a reminder that Trump sees the deals his team has negotiated as binding only on one party to the agreement, and that’s not the US.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
