Trade War and Peace

Endless tariffs

Trump is resorting to both traditional and unorthodox instruments in his tariff policy. The latter category includes tariffs that Trump justifies on the basis of “national emergencies” that he himself has declared under the International Emergency Eco­nomic Powers Act (IEEPA). These “emer­gencies” form the legal basis for the “reciprocal tariffs” that are to come into force on 1 August. It is controversial whether the law allows such comprehensive executive measures without the approval of Congress. Two federal courts banned the IEEPA-based tariffs at the beginning of June, but an appeals court overturned the ruling a few days later. Whether or not the Supreme Court will ultimately rule against Trump’s tariffs remains to be seen.

Regardless of how the dispute over Trump’s executive authority is resolved, further comprehensive tariffs are likely to be imposed beginning in autumn. This is because in order to impose so-called sectoral tariffs, the US government can resort to another law: the Trade Expansion Act of 1962. It is one of the US’ traditional trade instruments and has never been challenged by Congress or the courts.

When Trump took office in January, he instructed his cabinet to prepare tariffs on individual product groups. As with previous “sectoral tariff” decisions on aluminium, steel, cars, and car parts, Trump could now impose further tariffs on EU pharmaceutical products, semiconductors, semiconductor manufacturing equipment, critical raw materials, medium- and heavy-duty trucks, and aviation goods on the basis of Section 232 of the Trade Expansion Act due to a “threat to national security”. After the regu­lar review process, which requires involving the US Congress and stakeholders who would be affected by the tariffs, has been completed for those goods, recommendations for new sectoral tariffs by the Com­merce Department could be send to the President at any time between now and 270 days after the start dates of the investi­gations in early April and early May 2025, respectively. Public comment periods cus­tomary in the review process have already been completed and Trump is thus author­ised to decide on new tariffs and other measures on his own once the Secretary of Commerce submits his report on the proceedings. The US President has up to 90 days to do so, meaning that some of the tariffs on EU exports could be imposed as early as 1 August while others could follow in the next 12 months.

In addition, the Trump administration could impose further tariffs on individual trading partners, including EU member states, on the basis of Section 301 of the Trade Act of 1974 for alleged unfair trade practices. If the Trump administration concludes, for example, that the digital services taxes (DSTs) imposed by individual EU Member States constitute practices that are “unjustifiable, unreasonable, or discriminatory” and burden or unduly restrict US companies, the EU could face further tariffs, which Trump can raise at will and impose without any time limit. In his first presidency Trump used this measure, which was previously considered a “nuclear option”, only against China, but not against close allies. However, he had already launched a Section 301 process in response to DSTs in several countries, including some EU Member States.

More than just a battle plan

The EU has so far managed to stay united in its response to Trump’s tariff threats and actual imposed measures. Its strategy is aimed at limiting economic and political damage. The EU should continue to con­sider several scenarios, including the following: that the tariff dispute is inter­linked with the conflict over future distri­bution of defence burdens within NATO and that Trump is apparently prepared to put his geo-economic interests above inter­national law. Trump is also using security policy levers in tariff negotiations to increase pressure on individual Member States and thus divide the EU. Three sce­narios outline possible developments.

Increased alert

The outcome of the EU’s trade conflict with Trump remains open. The three scenarios outlined above are not mutually exclusive. It is possible that the situation could slide from one scenario to another – i.e., from purgatory to economic war – or that there could be an abrupt change, such as from an early agreement to economic war. Trump’s erratic decisions make it difficult to prepare for the future of the conflict and to find “safe” paths to a solution. One major diffi­culty for the Commission is that Trump’s objectives for his tariff policy are not clear. If his sole aim is to impose import duties out of a conviction to offset trade deficits, the EU could possibly prevent a tariff war by increasing its imports from the US and giving US companies even better access to the single market. It could lower its tariffs even further and remove certain non-tariff barriers that have been hampering US com­panies for many years. Finally, there is the option of importing more LNG and/or more expensive military goods from the US. How­ever, it remains unclear to its trading part­ners whether balancing trade accounts is the Trump administration’s sole or decisive goal – is it also about replenishing the treasury, protecting its own industries, or all at once?

The EU and Germany, its economically strongest Member State and political heavy­weight, must be prepared in case no agree­ment is reached in the tariff dispute. Even if a peaceful agreement on an early deal is reached, it must always be borne in mind that Trump could call the agreement into question again. Several conditions are emerging for the confrontation with Trump. Although these are not positive, they are relatively predictable. They therefore provide points of reference for developing policy approaches.

1. The US will maintain its tariffs at a high level. US economic policy is highly likely to remain protectionist for the foreseeable future, as this is in line with the political preferences of both the Republican and Democratic parties. The tariffs already intro­duced, export controls, and other coercive economic measures, all of which are al­ready having a negative impact on free trade, are unlikely to be the last measures taken. Trump is preparing a barrage of national security-related tariffs that are likely to be upheld by the Supreme Court if challenged at lower courts. In addition, legislative proposals calling for even tougher economic measures against China are gaining support in the US Congress. It now seems inevitable that the US will abandon the WTO’s MFN principle and strive for a new economic order in which it, as the centre of the global trading system, will grant other countries preferential access to the US market on a “case-by-case” basis.

2. The separation of powers does not prevent the US President from using “unorthodox” economic coercive instruments. So far, neither US Congress nor the courts have been able to prevent Trump from resorting to the IEEPA emergency law to introduce what appear to be arbitrary “reciprocal tariffs”. In the end, the Supreme Court, with its conservative majority, could side with the US President. Even among the ranks of CEOs from the largest US companies, no leader has yet dared to enter into open conflict with Trump on this issue.

3. The EU cannot rely solely on financial markets. Experienced negotiators have ad­vised the EU in recent months to wait for Trump’s tariff decisions and not to make too many concessions in advance. There was hope that sharp market reactions would dissuade him from imposing ex­cessive tariffs. In fact, it was primarily anonymous financial market players whose sales of US government bonds and US dollars prompted Trump to back down from his extreme tariff demands in early April. Their reaction expressed doubts about the long-term creditworthiness and strength of the US economy. However, it remains to be seen whether market reac­tions will prevent the US President from starting a tariff war with the whole world. Waiting and not preparing any effective countermeasures would be a risky strategy.

4. The costs of a trade war with the US are unevenly distributed across the EU and threaten to divide the EU. The direct economic costs of US tariffs are unevenly distributed across the EU, as its Member States vary in their dependence on exports. Export-oriented Member States with high sales in the US, such as Germany, Ireland, and Italy, are particularly affected. If they were to be tempted into bilateral agreements with Trump, the single market would be weak­ened and the future of the EU as a whole would be at stake.

5. Trump will not stop linking economic and security policy in order to divide the EU. Beyond the use of various trade instruments, fur­ther political escalation is also conceivable. The US could use security policy levers – such as its support for NATO or the nuclear umbrella – to assert its economic interests. The problem for the EU is that individual Member States perceive the military threat posed by Russia and other actors very differ­ently. While states on the eastern flank see a potential withdrawal of the US from Europe as an existential threat, others consider the security implications to be less dramatic. This heterogeneity of priorities within the EU could continue to further weak­en Europe’s ability to respond to Trump’s threats.

Recommendations

The German government should continue to take initiatives within the EU to act as a unifying force between economic strength and security. This requires not only finan­cial contributions, but also political leader­ship in prioritising and coordinating joint European projects. The following measures should be addressed as soon as possible within the EU:

• Establish a mini-lateral coordination format: Set up a strategic coordination mechanism between the economically strongest Member States (including Germany, France, Italy, and the Netherlands) and the states most vulnerable in terms of security policy, i.e., the “frontline states” (Poland, the Baltic states, and Finland). The aim would be to coordinate priorities and avoid blockades to counter Trump’s attempts to drive wedges between Europeans.

• Establish a politically supported compen­sation mechanism for companies: To cushion economic hardship and ensure acceptance, an EU-wide compensation mechanism should be created to provide targeted support to companies in sectors that are potentially most affected by trade and economic wars – in particular, companies involved in security-related transformation, such as ReArm Europe and energy supply or semiconductor production companies.

• Continuing and focusing of investment programs for ReArm Europe: The modernisation and standardisation of European armed forces should be driven forward through targeted investments and joint procurement projects.

• Continuation and strengthening of Euro­pean investment programmes: Strategic investments in critical infrastructure, technology promotion, and trade diversification should be accelerated and given a stronger geostrategic focus, such as in the form of an expansion of Global Gateway or a strengthening of EU trade with other countries.

For the first time since the Second World War, Americans and Europeans could find themselves not only as economic competitors, but as adversaries with incompatible geopolitical visions. The escalation steps outlined in the above “purgatory” and “trade and economic war” scenarios affect areas that go far beyond tariffs. Not least for domestic political reasons – to distract attention from problems in the US – a tariff war with the EU could benefit Trump. Once the conflict has broken out openly, it will be difficult to dissuade the US President from using further leverage, such as esca­lating the Greenland issue, withdrawing from NATO, or abandoning security guaran­tees. It should always be taken into account that for Trump, backing down on threats could mean losing face domestically unless he follows through on some of his threats every now and then.

The EU should therefore avoid open confrontation with the US government in the trade dispute for as long as possible. In anticipation of a situation such as that outlined in the “trade and economic war” scenario, the governments of EU Member States should define for themselves in the coming weeks where they draw the line when it comes to provocation by the Trump administration. If international law is vio­lated and the territorial sovereignty of a Member State is disregarded, the EU should not shy away from using its sharpest “eco­nomic sword”, the ACI.