Brussels starts to dance to Donald Trump’s tune

Welcome to Trade Secrets. Alan has taken a well-earned break/deserted his post in the great trade war. So with impeccable timing this week’s newsletter comes from Brussels, home of the “nasty”, “rip-off” EU.

We’ll try to work out what happens next following US President Donald Trump’s threat of 50 per cent tariffs on the bloc’s exports.

Charted Waters, where we look at the data behind world trade, is on US lobster exports, a case of nominative determinism if there ever was one.

Americans are from Mars, Europeans from Venus

Treasury secretary Scott Bessent said last week that Trump’s ultimatum aimed to “light a fire under the EU”. It worked. Within 48 hours the EU’s top official was on the phone to the president promising to speed up talks — if he retracted his threat.

Ursula von der Leyen had previously said she would get involved with final compromises only when a deal needed closing.

But Trump’s tirade forced her hand — along with, we are beginning to learn, some EU leaders. He didn’t fully back down, but shifted the deadline for 50 per cent tariffs from June 1 to July 9 — the original date when “reciprocal” rates would have gone back up to 20 from 10.

The European tone on Sunday night was very different to that on Friday, when trade commissioner Maroš Šefčovič spoke to Jamieson Greer, US trade representative, and Howard Lutnick, commerce secretary.

Šefčovič’s social media post called for “mutual respect, not threats” and said Brussels would “defend our interests”. Von der Leyen said “Europe is ready to advance talks swiftly and decisively”.

So will the bloc now start to make the sort of unilateral concessions the US expects, and that the UK did? We picked up US frustration the day before Trump’s threat. (That piece is also a good rundown of US asks and EU offers.)

But can the EU really conclude a sweeping deal with the US in just six weeks?

There are two big differences in approach. First, Trump can decide — and act — alone. He has an idea, and within hours an executive order is prepared and tariffs can be in place. He can reverse course as quickly, as he did on April 9 when he slashed the “reciprocal tariffs” imposed a week before to allow 90 days for talks.

The European Commission has power over trade, but it still has to convince a majority of the 27 member states to approve its decisions. So consultations with representatives in Brussels and national capitals are constant and time-consuming.

Second, the US cares little about the legality of its measures. Is there such a deep crisis in a country with a healthy growth rate that it can justify use of the International Emergency Economic Powers Act (IEEPA)? Can you justify tariffs on cars by using Section 232, that says national security is at stake? The courts will eventually decide — but by then Trump might have struck his deals, or found another law to try.

The EU is bound together by legal red tape. How else could you compel sovereign countries to allow routine cross-border movement of goods, services and people, and avoid subsidy races? As a soft rather than hard power, it relies on the international system — the World Trade Organization, UN and so on — to maintain a benign environment. 

An example: with Houthis attacking shipping in the Red Sea, which threatens EU trade more than US, the bloc set up a naval protection mission with just three ships.

The US-led Operation Prosperity Guardian, which includes an aircraft carrier, is far bigger. And its strikes on Houthi bases in Yemen have led to a temporary ceasefire.  

This feeds Washington’s resentment of what it regards as EU freeriding (though France, the Netherlands and Denmark did at least contribute a ship).

European attempts to protect cultural treasures also raise ire, whether that is television quotas for domestic films or restricting who can call a cheese Parmesan. How can the EU complain that the US is using security grounds to justify tariffs, when it bans on cultural grounds American beef from cattle that have been given growth hormones, officials muse.

And of course, apart from China, it is the one economic power big enough to stand up to Trump if it chooses. Officials in Brussels believe he will be forced to strike a deal because of the massive investment by US companies in the EU, and vice versa, and the self-harm tariffs will inflict. So they have played for time — but it might be running out.

So far the EU has had a muted response to Trump’s trade assault. It has loaded a revolver against Trump’s M240 machine gun (made in the US by a Belgian company, just to make the point). 

Member states have approved a €21bn package of up to 50 per cent tariffs on US goods such as maize, wheat, motorcycles and clothing, which will kick in on July 14 without a deal. The commission has also drawn up a €95bn list of other targets, including Boeing aircraft, cars and bourbon whiskey.

That is likely to be whittled down as member states request sensitive goods be removed. (The Belgians did some smart pre-lobbying to ensure diamonds were exempted from tariffs on precious stones before the list was even published.)

European businesses, already struggling with weak domestic growth, are not keen on retaliation. Already commission officials have said that any rebalancing, as they prefer to call it, must be “sustainable”. That is, long-term, low level actions that put steady pressure on Republican-voting states without damaging the EU economy much.

Trump’s escalation helps unite leaders behind the commission. If he follows through it will only harden member state support to join the hotheads such as France that advocate hitting US services, where the US has a trade surplus. That would require the first use of the “anti-coercion” instrument, a tool approved after Trump bullied France into dropping its digital services tax last time he was in office.

Dubbed the “bazooka”, it allows the EU to blow up any number of multilateral rules on procurement, investment and tariffs when retaliating.  

That still seems a way off. And for all the objections in Brussels to the UK decision to accept a 10 per cent “reciprocal” tariff level, how would the EU respond to the same offer — especially if taxes and standards were untouched? Retaliate and suffer, or adapt?

Charted waters

In Trump’s first term, the EU dropped tariffs on lobsters after its trade deal with Canada squeezed US crustaceans out of its market.

Lobster exports grew. But the deal ends on July 31, and is back on the menu.

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Trade Secrets is edited by Harvey Nriapia