The EU Prepares for Trade War Escalation

The Wall Street Journal reports Europe Prepares for a U.S. Trade Fight

The European Union thought it was on the verge of a deal with the U.S. to keep tariffs in check. Now it is readying a counterattack.

U.S. officials told the EU’s trade chief this past week that they expect President Trump to demand further concessions from the bloc to get an agreement, including a baseline tariff on most European goods that could be in the range of 15% or higher, according to people briefed on the talks.

That was an unwelcome surprise for the EU, which had been working toward an agreement that would have kept baseline tariffs at 10%, already a tough concession for some of its 27 countries. The shift prompted Germany, Europe’s biggest economy and its largest exporter, which had previously been more dovish on U.S. retaliation, to swing closer to France’s more confrontational position, according to people close to the discussions.

In the months since Trump took office, EU trade chief Maroš Šefčovič has flown to Washington half a dozen times. He has had multiple calls and texts with U.S. trade officials. And he has said Europe was willing to lower tariffs and buy tens of billions of dollars of U.S. energy products and advanced semiconductors.

The bloc has little to show for his efforts. Earlier this month Trump threatened 30% tariffs on imports of most goods from the EU, up from the 20% the president first floated in April.

Even German officials, who have pressed for a quick deal, no longer see an agreement with the U.S. as the most likely outcome, people familiar with the matter said.

On Friday, Berlin signaled it could support the EU using its so-called anticoercion instrument, a legal tool that lets the bloc hit back at economic bullying with a range of restrictions on trade and investment. It has never been used before.

While U.S. Trade Representative Jamieson Greer suggested the 10% baseline tariff the two sides had negotiated still made sense, Lutnick suggested the levy would need to be higher, a European diplomat said. Šefčovič left his meetings with the understanding that the U.S. was pressing for a baseline tariff of 15% or more, people briefed on the matter said.

German leaders initially understood Trump’s letter threatening 30% tariffs as a last-minute ploy to extract better conditions. They finally snapped after finding out about U.S. officials’ pressure this past week for the EU to accept higher baseline tariffs and no relief for its auto sector. The shift persuaded Berlin to open the door to retaliation, an official with knowledge of the situation said.

The End if Transatlantic Trade

Reuters reports EU to Ramp Up Retaliation Plans as US Tariff deal Prospects Dim

An increasing number of EU members, including Germany, are now considering using wide-ranging “anti-coercion” measures which would let the bloc target U.S. services or curb access to public tenders in the absence of a deal, diplomats say.

The European Commission, which negotiates trade agreements on behalf of the 27-member bloc, had appeared on course for a agreement in which the EU would still have faced a 10% U.S. tariff on most of its exports, with some concessions.

Such hopes now seem dashed after President Donald Trump’s threat to impose a 30% tariff by August 1, and following talks between EU Trade Commissioner Maros Sefcovic and U.S. counterparts in Washington last week.

Sefcovic, who has said a 30% tariff would “practically prohibit” transatlantic trade, delivered a sober report on the current state of play to EU envoys on Friday, diplomats told Reuters.

France has consistently advocated using the ACI, but others have baulked at what some see as a nuclear option. Trump has warned he will retaliate if other countries take action against the United States.

European Commission President Ursula von der Leyen said a week ago that the ACI was created for extraordinary situations, adding: “We are not there yet.”

The Commission would need a qualified majority of 15 countries making up 65% of the EU population to invoke it. It would not do so unless it was confident of passing it, but there are now growing signs of support building, with Germany among the countries saying it should be considered, EU diplomats say.

Qualified Majority

Germany and France together account for approximately 34% of the European Union’s total population. Germany represents 19% and France represents 15% of the EU population. These two countries, along with Italy, comprise almost half (47%) of the EU’s population.

Spain is another 11 percent of the EU. That would push the total 58 percent. If the four largest support the move, it’s highly likely the EU would get to the required 65 percent.

Anticoercion Instrument

The EU Anti-Coercion Instrument is a regulation designed to protect the EU and its member states from economic coercion by third countries. It allows the EU to impose countermeasures, including trade restrictions and investment controls, in response to actions by non-EU countries that attempt to pressure the EU or its member states into specific policy decisions. The primary goal is to deter such coercion, but it also provides a mechanism for responding when deterrence fails.

Purpose: The ACI aims to counter economic coercion, which is defined as a situation where a third country uses trade or investment measures to influence the EU’s or a member state’s policy decisions.

Deterrence: The instrument is designed to act as a deterrent, discouraging third countries from engaging in coercive actions.

Response Measures: If deterrence fails, the ACI allows the EU to take various response measures, such as imposing tariffs, quotas, and other trade restrictions.

Scope: The ACI can be used in situations where a third country’s actions affect trade or investment and interfere with the EU’s or a member state’s sovereign choices, even if no formal trade dispute exists.

Legal Basis: The ACI is a regulation, meaning it is directly applicable in all EU member states.

Examples: The ACI was partly inspired by China’s actions against Lithuania in 2021, where China reportedly imposed trade restrictions in response to Lithuania’s relationship with Taiwan.

Potential Use: The ACI has been discussed as a potential response to future US tariffs. Some countries, like France, favor its use more readily than others who see it as a “nuclear option”.

Likely Targets

• Trade in services: The US has a trade surplus in services with the EU, so the ACI could target this sector to exert pressure.
• Public procurement: This market is worth around €2 trillion per year in the EU. The ACI could limit US companies’ access to these tenders or impose penalty score adjustments on their bids.
• Access to financial service markets: Restrictions could be placed on US companies seeking to operate within the EU’s financial sector.
• Investment: The EU could restrict US investment in its markets.
• Protection of intellectual property rights: Measures could be taken to limit the protection afforded to US intellectual property within the EU.
• Restrictions on the sale of US goods: This could include chemicals and food products in Europe.
• Specific individuals and companies: If a foreign government uses certain companies to exert economic pressure, the ACI could target them. 

Both sections above are AI-Generated but sound right, especially restrictions on services.

The EU had a services trade deficit of €109 billion with the U.S. in 2023, according to the European Parliament.

The EU’s Correct Response

I addressed EU responses on July 14 in How Should the EU, Mexico, China, and Canada Respond to Trump’s Tariffs?

I have two answers. One idea is radical but it would work.

Answer One: Do nothing

Tariffs are a tax on consumers. So it Trump want to be raise taxes on US consumers, then let him.

And if he wants to make the US an island, them let him. Besides, it’s impossible to negotiate with someone who cannot be trusted to honor any deal he makes.

Vietnam thought Trump agreed to 11 percent tariffs only to discover the deal was really 20 percent.

It’s best to ignore Trump, or perhaps praise him. But offering concessions seems to do nothing but get trump demanding more concessions.

Given tariffs are a tax on consumers, so are tariff retaliations.

If your neighbor blows off his foot, do you really want to do the same?

Answer Two: Retaliate by More than Trump Can Take

This is much easier for China than any other country. Trump deescalated tariffs on China when China blocked rare earth exports.

Mexico and Canada could block exports of auto parts. Canada has oil the US needs.

Mexico provides most of the hospital kits for the US. Blocking those kits would cause shortages and negatively impact patient care. It would also cause delays in treatments and compromise patient safety.

Canada and Mexico are also leading exporters of copper to the US. And Canada is the largest Aluminum exporter to the US.

Click on above link for more details.

As expected, the EU is sliding toward option three, some sort of limited retaliation. Let’s see if they pull the trigger on anti-coercion.

With Germany on board, it’s possible. But Trump may throw Germany a bone.

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