It is hard to keep track of all the tariffs that U.S. President Donald Trump is announcing or enacting these days. On top of the 10 percent tariffs that he imposed on China on Feb. 4, Washington has announced across-the-board steel and aluminum tariffs effective March 12 and plans to discuss reciprocal tariffs on all countries on April 2. On the same day, a 25 percent tariff on Canada and Mexico could come into effect, in addition to a tariff specifically targeting U.S. car imports. Yesterday, to round things off, Trump said that he will “very soon” announce a 25 percent tariff on imports from the European Union.
Trump’s fixation on tariffs is odd, since such duties make up just about 2 percent of U.S. federal revenues, in line with the average in other high-income economies. Average tariffs also move in a similar range, with the U.S. trade-weighted rate of 2.2 percent not much different from Japan’s 1.9 percent and the EU’s 2.7 percent.
It is hard to keep track of all the tariffs that U.S. President Donald Trump is announcing or enacting these days. On top of the 10 percent tariffs that he imposed on China on Feb. 4, Washington has announced across-the-board steel and aluminum tariffs effective March 12 and plans to discuss reciprocal tariffs on all countries on April 2. On the same day, a 25 percent tariff on Canada and Mexico could come into effect, in addition to a tariff specifically targeting U.S. car imports. Yesterday, to round things off, Trump said that he will “very soon” announce a 25 percent tariff on imports from the European Union.
Trump’s fixation on tariffs is odd, since such duties make up just about 2 percent of U.S. federal revenues, in line with the average in other high-income economies. Average tariffs also move in a similar range, with the U.S. trade-weighted rate of 2.2 percent not much different from Japan’s 1.9 percent and the EU’s 2.7 percent.
Seen from Europe, Trump’s obsession with tariffs looks alarming. On paper, four of the five proposed measures— the blanket tariff on imports from the EU, the steel and aluminum tariffs, the reciprocal ones, the measures targeting cars—could hit the bloc hard. In turn, over the past weeks, EU officials have been at pains to outline that that tariffs are “bad for business, worse for consumers” and “harmful to the global trading system.”
From that perspective, it may seem a little strange that the mainstream assumption appears to be that the EU should retaliate with the same poison and raise tariffs on the United States. This stance makes little sense. Europe has little to gain—and possibly a lot to lose—from responding to Trump’s tariffs.
Economists like to disagree, but they typically see eye to eye on at least one thing: In developed economies, tariffs—a tax that domestic firms and consumers pay on imports—are more often than not a poor idea.
Trump’s tariffs do not tick any of these boxes: They are across-the-board, random measures that appear to come and go depending on the presidential mood. In turn, it may not come as a surprise that the tariffs that Trump imposed in 2018 resulted in an estimated net welfare loss of $7.2 billion in the United States, even after accounting for increased tariff revenues and the gains to some domestic producers benefiting from protection.
This data illustrate an inconvenient truth for tariff fans: Even if some industries benefit a little from the new tariffs (for instance, U.S. steel producers), a wide array of downstream manufacturers face higher costs because of them, which weighs on employment, investment, and exports. In such a scenario, the only option for Washington to mitigate the inflationary impact of tariffs would be to subsidize costlier U.S. production.
This is not going to happen. Even at high rates, Trump’s tariffs will not generate enough money for the U.S. government to splurge—let alone replace income taxes, like Trump fantasized during his election campaign last year.
The issues with tariffs do not end there. Firms typically pass on higher costs to consumers, who eventually shoulder most of the tariff burden. The figures are far from a rounding error: The Peterson Institute for International Economics calculated that if enacted, the proposed tariffs on Mexico and Canada (on top of the 10 percent tariff already imposed on China) could cost a typical U.S. household at least $1,200 per year.
Retaliatory tariffs on the United States would be just as bad an idea for Europe. If the EU goes down that road, European manufacturers would face higher input costs at a time when many sectors already struggle amid high energy prices and growing Chinese competition. (German carmakers come to mind as a particularly good example of firms that would be most affected.)
And just like U.S. tariffs will hurt American households, EU tariffs would also act as a tax on European consumers, fueling inflation at a time when the cost of living is already their top concern, according to a survey conducted by the European Parliament last year. By contrast, estimates suggest that avoiding retaliation to U.S. tariffs would result in minimal hit to EU GDP, a reduction of just 0.1 percent. (This modeling assumes a U.S. tariff rate of 60 percent on China and a rate of 10 percent on other economies).
Beyond economics, it is not hard to see how Europeans could end up in bitter political fights over the shape of retaliatory tariffs. Many EU economies have deep trade ties to the United States in one way or another. Some of them (such as Austria, Finland, Germany, Ireland, Italy, and Portugal) ship more than 20 percent of their extra-EU exports to the United States, suggesting that their willingness to risk triggering an unpredictable transatlantic trade war could be low.
And many EU economies (including Belgium, France, Ireland, Lithuania, Luxembourg, and the Netherlands) rely on the United States as a top source of imports, meaning that EU tariffs would fuel domestic inflation. Add the fact that yet other member states, such as Sweden, want any prospective retaliation to conform to World Trade Organization rules, which is virtually impossible. Arriving at an EU-wide consensus on how to respond to Trump will clearly be hard.
The issues with EU coordination would not end there, for at least two reasons. First, Trump’s insistence on treating EU countries on a case-by-case basis means that EU governments face a prisoner’s dilemma. Game theory suggests that going it alone and trying to cut bilateral deals with Trump, instead of collaborating with EU neighbors, could leave them better off. Some member states, such as Hungary, appear keen to cozy up to Trump anyway, making it unlikely that they would be on board with anything more than a symbolic EU tariff. Second, the risk of fragmentation is also high when it comes to the European Commission’s package of carrots that are supposed to convince Trump to spare the EU from tariffs; proposals include pledges to buy more U.S. weapons (a nonstarter for France) and get tougher on China (good luck with that in Germany).
This begs the question of how, if not with tariffs, Europeans should respond to Trump’s actions. Looking in the mirror and addressing the EU’s own trade weaknesses would be a good start. Intra-EU trade costs and barriers are so high that on average, they are equivalent to a tariff of 44 percent on shipments of goods (excluding agriculture) and 110 percent for services exchanges across EU member states—far more than any tariff Trump will ever impose on the bloc.
Such barriers include poor border infrastructure, the lack of regulatory harmonization, and the coexistence of many national procurement regimes. Europe’s willingness to impose de facto tariffs on itself comes with serious consequences: Trade across EU member states is less than half the level of trade among U.S. states.
And in the area of trade, completing the European Union’s “Single Market” is not the only item that should be at the top of the bloc’s to-do list. Inking trade agreements with developing economies, starting with the Mercosur bloc, also comes to mind at a time when EU firms worry that tariffs will weigh on their exports to the United States.
If doing nothing in retaliation is not an option for political reasons, then EU leaders could do worse than looking at China for tips on smart retaliation. Following the imposition of Trump’s 10 percent tariff on all U.S. imports of Chinese goods, Beijing’s response has been remarkably muted. China enacted a 15 percent tariff on imports of U.S. liquefied natural gas and coking coal, in addition to a 10 percent tariff on crude oil. Altogether, these cover only $13.9 billion of annual imports from the United States, or just 0.5 percent of China’s total imports.
In doing so, Beijing has adopted a sensible strategy of imposing surgical retaliatory tariffs that will support its long-stated goal of boosting energy security. This is exactly what Europeans should do: use Trump 2.0 as an opportunity to turbocharge the adoption of policies that they need to implement anyway in order to boost their economic prospects.
All things considered, Europeans may be better off being the adults in the room and letting Trump hurt the U.S. economy if he so wishes. Retaliatory tariffs enacted by the EU would not only fail to solve the issue (no, Trump will not back down), but they would also create a slew of new problems for Europeans.
By contrast, avoiding retaliation means that the economic costs of tariffs would be borne mostly by American businesses and households. At a time when all the talk in Europe is about narrowing the growing gap between the EU and U.S. economies, this would not be an entirely bad thing.
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