EU braces for potential trade war as Trump threatens tariffs

"I told the European Union that they must make up their tremendous deficit with the United States by the large-scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!" - Trump wrote in a December post on the social media site Truth Social.

The deficit is indeed enormous. In 2023, European Union countries exported goods worth 502 billion euros to the USA, while imports from the USA to the EU amounted to 344 billion euros. As a result, the EU recorded a trade surplus with the USA, which totaled 158 billion euros.

The potential imposition of 10-20 percent tariffs by the USA on imports from the EU, followed by retaliatory tariffs from the EU, could lead to greater losses for European countries. Trump aims to support domestic production this way, even if it is uncompetitive compared to foreign products.

The announcement of tariffs has ignited fears of a trade war in EU capitals. Analysts believe such a scenario is realistic. However, there are opinions in Brussels that tariffs and a trade war can be avoided. A bargaining chip for Brussels in talks with Trump could be the import of LNG, or liquefied natural gas, to the EU.

Jacob F. Kirkegaard, an expert at the Brussels-based think tank Bruegel, noted that Trump leverages tariff threats to advance various political objectives. In the case of China, the aim is to weaken its economy, while Canada and Mexico focus on curbing immigration and drug smuggling across the border. Regarding Europe, Ukraine is one element of the broader relationship, but Trump also seeks concessions in other areas.

The United States is currently the largest supplier of LNG and oil to the EU. These imports increased over the past two years after Russia attacked Ukraine, and Russian energy supplies to the EU were significantly reduced.

Despite several sanctions packages imposed on the Kremlin by the EU, Russian LNG still reaches European terminals. Further restricting gas imports in this form from Russia could open the door wider for American companies exporting raw materials. This might persuade Trump that starting a trade war with Europe is not worthwhile.

The stakes are high because 502 billion euros of annual exports from the EU to the USA include machinery and electronic equipment, cars and car parts, pharmaceutical and chemical products, and luxury goods. These also represent millions of jobs in European industry and substantial tax revenues for EU capitals.

Although there is hope for an agreement, experts agree that the EU should not wait for Trump's decisions but be prepared for a negative scenario.

According to Bruegel analysts, the EU should first employ diplomacy and, in exchange for refraining from imposing tariffs, propose increased LNG imports or purchases of military equipment. The EU could also lower tariffs on car imports from the USA.

Besides the carrot, however, a stick is needed. Analysts suggest that a "credible threat of retaliation" is necessary. The European Commission should prepare a list of products imported from the USA to the EU that could be subject to the same tariffs - ranging from 10 to 20 percent - as potential retaliatory measures. However, imports upon which the EU is heavily dependent should be excluded from this.

Secondly, the EU should maintain and strengthen the current trade system based on World Trade Organization (WTO) principles since this organization can be approached for arbitration in trade disputes.

Finally, experts recommend that the EU expand its network of trade agreements, particularly with Mercosur, the United Kingdom, Switzerland, and in the Indo-Pacific and African regions.

Europe must respond firmly yet cautiously. Retaliatory tariffs could escalate tensions, but open capitulation would set a dangerous precedent - said Charles Grant, director of the Centre for European Reform, as quoted by the "Times".