TheMarketForIdeas

While few would compare Donald Trump to Mahatma Gandhi, a saying by the Indian leader applies to the US President: “first they ignore you, then they laugh at you, then they fight you, and then you win.” The recently announced EU-US trade agreement represents a political triumph for Donald Trump and his political vision of recalibrating trade, economic, technological, and security relations with the rest of the world, including its most important allies. From the famous clip of German delegates laughing at Trump in 2017 when he warned them about their dependence on Russian gas to today’s “unequal treaty”, Trump has managed to prevail despite domestic and foreign opposition. The economic realities behind the agreement are uncertain, as is the implementation of its vague commitments. It may well be that US citizens will suffer the most from Trump’s campaign, but the way these negotiations were presented as conflict and aggression required the designation of a winner and a loser. The agreement is therefore a political disaster for Ursula von der Leyen and the “Geopolitical Commission” that was meant to transform the EU into a global power. Several European leaders, including Pres. Macron who wanted the most aggressive approach against the US, have denounced the agreement as a continuation of a “century of humiliations” for Europe similar to those suffered by colonized countries. The hyperbole takes on a life of its own and may lead to drastic political changes in the EU. The problem is not that the Europeans do not have skilled negotiators, but that their negotiating position was weak from the start after the EU’s economically lost generation (after the 2008 crisis) and after the effect of “perma-crises and poly-crises” (in the World Economic Forum’s formula). These include the sovereign debt crisis, the refugee crisis, the Covid pandemic, the invasion of Ukraine, the sanctions imposed on Russia and the failure of the EU’s political and economic system, in particular the drastic bet on combating climate change at the expense of energy security. From aspiring to equality with and surpassing the US, the EU has fallen far behind and its strategic and technological autonomy has regressed.

As I was saying, the agreement itself is much more nuanced and some elements may even be to the major advantage of the Europeans. The Europeans have been put on the wrong foot (despite being warned since 2016) by the conflation of economics with security and technology in these negotiations, when a purely economic approach (the standard of the globalization era) would have benefited them. Trump’s rejection of multilateralism opens the way to individualized and modular agreements with individual actors in which the sheer scale of the US can be used to the fullest and provisions can be adapted to current American strategic interests. The American political triumph is obvious, but it remains to be seen whether the macroeconomic, technological, industrial and strategic benefits will materialize, or whether Trump has only succeeded in generating inflation, higher prices for American consumers and an acceleration of the US’s relative decline compared to the rest of the world, with consequences also for the international order that Americans prefer.

Tariff anger

Amid growing disputes with the US over issues such as regulating tech and social media companies, taxing them, aiding Ukraine and sanctioning Russia, the US attempt to renegotiate trade relations with the Europeans has been seen as a betrayal and an act of aggression. It is unlikely that a future Democratic Administration would revert to the pre-Trump status quo and forgo the already substantial revenue from import taxes when it could reallocate it for its own agenda. In this context, European public discourse on tariffs has been heavily politicised. The 15% level alone does not allow us to estimate the damage to the European economy. Under orthodox pre-Trump economic interpretations, Americans are hurting themselves with these tariffs and the EU would be hurting Europeans if it imposed tariffs on US products in response to Trump. US importers are the ones who directly transfer the 15% tariff, but who actually pays (the importer or the exporter) varies from one sector and market segment to another, reflecting the availability of the cheapest viable alternative to a European import. This phenomenon is called “pass through” and reflects the negotiation between the importer and the exporter. If Intel wants to import a chipfab from ASML in the Netherlands, it has no alternatives for advanced stereolithography and then it will absorb the 15% cost in its entirety (and will inevitably pass it on), burdening American efforts to reindustrialize in high-tech areas because it will increase the cost of inputs (including steel and other elements necessary for rapid growth). If we are talking about importing a car, then a reduction in the price charged by the manufacturer, absorbed from its profit margin, will most likely be negotiated, because the US importer could turn to other cars in anticipation of a change in behavior induced by price sensitivity. Often, concessions are made on both sides. It is clear that, overall, consumer prices will increase and thus inflation. It is not clear that Trump will achieve what he wants at a systemic level, i.e. domestic import substitution including through foreign investment in US manufacturing to avoid tariffs. It should be noted here that although the agreement with Japan and the one with the EU foresee enormous investments of 600 billion dollars in the case of the Europeans, they are defined only in monetary terms, which means that they could just as well result from the acquisition of strategic American companies (which Trump would like to block as was recently seen in the metallurgical industry) or of various assets such as critical infrastructure instead of greenfield investments in manufacturing.

We may also witness “trade diversion” effects in which orders to EU companies increase because other countries have even higher tariffs (such as China with 40%, India with 25% and then threatened with 50%), and 15% is close to the 10% base level for any American foreign trade relationship. In this context, the EU will be a net winner of the American trade renegotiation campaign.

The biggest risk is not that a 15% tariff would be devastating for Europe’s export economy, but that Trump will use his recent successes to continuously threaten new tariffs to obtain other concessions, some only symbolic or politically expedient relative to his electorate (in no case will the Europeans eliminate VAT). The most destructive thing for the European economy will be the uncertainty about tariffs, an uncertainty that convinces companies to hold onto financial reserves instead of distributing dividends, to postpone investment projects, and which reduces liquidity in capital markets and raises interest rates.

Does the UK get a better deal?

Part of the media frenzy following the announcement of the deal has been about the treatment of the UK, which has been given a standard tariff of just 10%, which seems to be the bare minimum in the MAGA trade paradigm. This is used as a pretext for European self-flagellation and Brexit-praise. In my opinion, the UK has not got a better “deal” in any way. The tariff is accompanied by some pretty drastic quotas – for example, in the car industry, where the first 100,000 cars exported to the US will be subject to a 10% tariff and anything above that will be 27.5%, which will automatically limit British industry. The UK has also compromised much more of its strategic autonomy, which may be a triumph for a political establishment that didn’t believe in Brexit in the first place. For example, the United Kingdom will align itself even more with the US campaign to slow China’s rise and isolate it economically in key areas. However, British Prime Minister Keir Starmer had signed a reset of relations with Xi Jinping in 2024. Basically, the Americans have forced a 180-degree turn on the UK, through which they will limit the ability to carry out economic projects with China and through which they will try to block Chinese diplomatic projects, such as its entry into the plurilateral agreement on government procurement within the World Trade Organization, which would have removed many barriers to Chinese companies winning direct contracts with the state.

The benchmark we should use to compare the terms and course of the EU-US agreement is not the UK, but Japan, which has a major industrial surplus in its economic relationship with the US, a stagnant economic situation but with peaks of industrial excellence and a critical role in global supply chains, as well as a major security dependence on the US that compensates for domestic military handicaps and therefore suffers from anxieties related to American isolationism.

Trump’s “Energy Weapon”

The most intense criticism of the agreement focuses on the provision that the EU will purchase 750 billion euros worth of energy over the next three years. Critics have countered that this is nonsense given that, while the US is already the EU’s largest external supplier of liquefied natural gas (LNG) and has replaced Russia, the EU imports no more than 70 billion dollars a year in total energy (oil, nuclear fuel, coal, gas) from the US. Even if the EU replaces the last remnants of its energy relationship with Russia (whose LNG exports to the EU doubled post-invasion, through the exception for importing energy by sea), it will still not be able to import more than 200-210 billion dollars worth of energy from the US over the next three years, assuming recent average prices persist. These critics omit, perhaps out of habit in European practice, the fact that European companies can now enter into long-term energy supply agreements with the Americans and thus bring in the present energy purchases for future delivery. While it cannot (yet) mandate this, the EU can encourage such contracts, just as it now encourages large industrial electricity consumers, defense ministries and others to enter into direct “power purchasing agreements” with electricity producers rather than with intermediaries who often do not have their own production capacity. This is similar to how China has entered into major energy (mainly natural gas) agreements with Russia since 2014 (three in number, all for 30 years), and all to its advantage from an energy security (and price) perspective. Europeans have a low level of use of long-term natural gas supply agreements by contrast to the rest of the world, with only 40% of the required volumes contracted (compared to 225% of the contracted demand in 2014), because their environmental and decarbonization projects have reduced the visibility of post-2035 consumption, discouraging the signing of long-term supply contracts. Ironically, the agreements with Gazprom for Nord Stream 1 and 2 were the last large agreements concluded, and they are clearly no longer relevant. Reliance on the spot market for consumption in the context of reduced excess capacity in energy markets (especially in regionalized gas markets) leads to price volatility and energy insecurity, promoting high prices and deindustrialization. Europeans also have a new tool they could use to facilitate these long-term purchases, the EU Energy Platform launched in 2022 specifically to facilitate contacts between buyers and sellers. Advantageous deals can be made with the US, as the country will double its LNG export capacity by 2028 and will likely tap new resources in regions like Alaska where lack of infrastructure has limited gas extraction (unlike oil). This is the opposite of the situation inaugurated by Biden in the last months of his term when he limited new LNG export licenses in a bid to simultaneously appease green activists and economic populists, who wanted Americans to pay less for natural gas by limiting export capacity. One can imagine a situation in which even European negotiators would have asked Trump to include these long-term purchases in the deal in order to short-circuit Europe’s domestic green opposition, even at the risk of increasing prices for American consumers. The Europeans have ended up in a situation where countries like China are contracting volumes of LNG far larger than they could consume in any scenario (given the growth of domestic production and the future Siberian capacities through the Power of Siberia 2 pipeline). Essentially, they are betting that the Europeans will fail to decarbonize their economy and even if the US and Qatar continue to be major LNG producers, the Chinese will have already contracted much of the capacity and will be able to sell the excess at a premium to the Europeans when they need it. This leads to the surprising conclusion that Trump’s more rational exploitation agenda of the EU is in fact much better for the EU than the EU’s own policies as they related to security of energy supply.

Conclusion

The EU-US trade deal is a political triumph for Trump and a political disaster for the European Commission. In economic and practical terms, it is much more nuanced. We are entering uncharted territory with these tariffs, despite media allusions to a return to the past. The protectionism of previous eras existed in a very different context to today. The former president of Estonia, Hendrik Ilves, had a saying about communist societies that can also be applied to globalized economies that are turning to protectionism: “you can make fish soup out of an aquarium, but you can’t turn the fish soup back into an aquarium”. The European Union needs to find new solutions and paradigms in response to the failure of its existing models, and the agreement with the US, especially its energy component, can be an important stimulus towards a better strategic direction for Europe. In addition, it is important to see the exceptions to the tariffs that will be decided for key products, including special equipment such as those of ASML. We may see that, for strategic reasons, the American and European economies will be even more closely integrated for dual-use products, such as those for the military and space industries, even if French cheese and American bourbon will have relatively high tariffs on them. I return to my previous assertion that the American interest is not a break with Europe and its push towards China or Russia (although a miscalculation may lead to this result), but rather the use of its unprecedented influence in the contemporary period (now also in energy and in direct security through Ukraine) to subordinate the European economy (not impoverish it, though it entails a loss of opportunity) and integrate it into the superstructures necessary to ensure the economic, technological and industrial capacity of the US to confront China. The Trade and Technology Cooperation Council established in 2021 was a first step in this direction after the resumption of bilateral summits, and the invasion of Ukraine provided the opportunity to accelerate this project.

Photo source: PxHere.