What exactly lies behind US President Donald Trump’s 50% tariff on EU imports to the US? Honestly, your guess is as good as mine or anyone else’s.
This unexpected policy shift emerged suddenly yesterday morning in Washington—just when people might have been anticipating a winding down for the long Memorial Day weekend.
Instead, Mr. Trump’s social media post acted like a laxative for financial market traders on both sides of the Atlantic.
However, it wasn’t the major panic we’ve seen during past tariff-fueled market meltdowns.
The China tariffs escalated quickly through reciprocal retaliation until they reached untenable levels, making trade impossible. Consequently, exports from China to the US halted, particularly concerning given China’s enormous trade surplus.
This led to executives from Walmart and Target reaching out to the White House to inform the president that shelves would be empty within weeks. Meanwhile, the head of the Port of Los Angeles, the nation’s largest, appeared on television explaining how few ships were arriving to be unloaded, carrying consumer goods and industrial components.
Before long, the China tariffs were reduced to 30% for a new 90-day negotiation period.
The EU does not operate like China, which may be part of the current challenges from a US perspective.
On one hand, the EU typically avoids escalating tensions and engages in more low-key diplomacy, aiming to keep emotions out of negotiations. Think of Michel Barnier during Brexit or Maroš Šefčovič’s discreet diplomacy post-Brexit.
On the other hand, avoiding provocation can sometimes lead to more provocations. Thus, Mr. Trump’s raise of the general EU tariff rate from 20% to 50% may be sending a message.
Following Donald Trump’s announcement of the 50% tariff threat, Eurozone government bond yields plummeted.
What began as a suggestion in his morning social media post quickly turned into a definitive policy by the afternoon, set to commence on June 1st. When pressed by a reporter about the possibility of the EU negotiating a deal in nine days, he responded:
“I’m not looking for a deal. I mean, we’ve set the deal. It’s at 50%, but again, there is no tariff if they construct their plant here. If someone wants to set up a plant here, I might discuss a slight delay,” said Mr. Trump.
“We’re going to see what happens. But right now, it’s going into effect on June 1st, and that’s the way it is.”
Earlier, Treasury Secretary Scott Bessent told Fox News that the 50% tariff proposal was intended to expedite negotiations with the EU, compelling them to put forth a “high-quality offer.”
“The 90-day pause on the April 2 tariffs was contingent on countries or trade blocs negotiating in good faith. The president believes EU proposals haven’t matched the quality of those from other significant trading partners,” Mr. Bessent stated.
When asked if a deal could be concluded in nine days, Mr. Bessent replied:
“I won’t negotiate on television, but I’d hope this would motivate the EU, as they have a collective action issue.” He noted that commentaries from 27 countries were led by one group in Brussels, suggesting that some member states weren’t fully aware of the EU’s negotiations on their behalf.
This accusation implies the EU is not negotiating in good faith and suggests a disconnect between member states and the EU Commission.
From Brexit, we understand that member states closely monitor trade negotiations, establishing parameters and lobbying for their interests both in Brussels and beyond.
The US has charged the EU with not engaging in good faith negotiations.
However, the US strategy might involve sowing confusion about the distribution of responsibilities. They could also be genuinely confused themselves (though it’s less likely with US Trade Representative Jamison Grier, who understands the Brussels structure well).
The confusion could stem from the fundamental differences in governance: the EU is confederal, giving member states significant power, while the US features a more centralized federal government.
While concepts like “states’ rights” exist in both systems, political authority in the US is centralized, contrasting with the EU’s diverse power distribution through national governments, parliaments, and EU institutions.
This creates challenges in dealing with the EU unless specific requests are clearly defined.
Even a straightforward trade and investment pact can flounder due to objections from a single member state, as evidenced by Ireland’s failure to ratify the EU-Canada trade agreement (an unfavorable scenario when attempting to get Canada on board to mitigate the impacts of Mr. Trump’s tariffs).
The Trump administration might have overreached with ambitious goals during the 90-day negotiating period with such a complex political and economic entity.
When asked by a reporter about measures the EU could take to avert the 50% tariff, Mr. Trump replied:
“They haven’t treated us properly. They haven’t treated our country right. They unified to take advantage of us. I’m sure the EU wants to make a deal badly, but they just don’t do it correctly,” the president said.
“They won a $17 billion lawsuit from Apple, and I read that case; it wasn’t one that should have been won. They’re suing other companies and using it as a weapon, primarily to fund their activities.”
“They don’t take our cars; they don’t take our agriculture; they don’t take anything. Yet we import their cars by the millions. So, they have the jobs, they earn the money, and we end up with closed factories. That will no longer happen.”
No, it’s not accurate to say that Europe doesn’t take US cars, agricultural products, or any other goods from the USA. Furthermore, it is incorrect to assert that the EU was established to exploit the US.
Additionally, fines from the European Court of Justice are not fundraising mechanisms for EU member states (Ireland, which received the Apple payment, opposed the Commission through the court and sided with Apple).
Interestingly, the president seemingly disregarded the irony of discussing fundraising schemes targeting Apple on the same day he announced a 25% tariff on Apple iPhones unless produced in the USA.
This not only triggered a drop in Apple shares but also raised questions about the legality of a president imposing tariffs on a single company.
However, by the signing ceremony where he made public statements, the president changed his stance, indicating that the phone tariff would apply not only to Apple but also to Samsung and any other companies wanting to sell phones in the US.
Commentators on US business channels are skeptical that anyone could establish a US-only manufacturing plant within a presidential term—shifting the supply chain alone presents colossal logistical challenges, along with costs that would ultimately fall on consumers.
As one Wall Street analyst quipped, Apple ought to initiate the construction of something substantial, then once Mr. Trump leaves office, transform it into a warehouse.
What should the EU do in response?
Perhaps the EU needs to help the US identify achievable concessions, allowing them to declare victory before a potentially damaging trade war escalates.
In dealing with the adversaries across the river, it would be wise for the US to clarify its objectives—a common complaint in Brussels is that nobody knows what is being requested.
It is futile to ask Mr. Šefčovič to negotiate on VAT or any tax.
As we are reminded by the Corporation Tax reforms (from which the US has withdrawn), taxation remains an exclusive competence of member states, and none will relinquish VAT. It is a lucrative tax that generates significant revenue without discriminating against US products—everyone bears the burden.
Moreover, EU member states are keen to lobby for their economic interests.
Mr. Bessent’s comments regarding member states’ lack of awareness in what the Commission is negotiating might relate to the numerous EU ministers and prime ministers who have visited Washington since Mr. Trump assumed the presidency, all seeking to gain favor with the administration.
In Ireland’s case, the Taoiseach, Tánaiste, Minister of Agriculture, and Minister of Enterprise have all visited the US in the past 60 days.
Non-tariff barriers are technically complex and usually require years to negotiate but can be addressed.
The EU has successfully pressured other countries over the decades, notably Japan, to reduce technical trade barriers—legend has it that Japanese authorities used to block imports of skis, claiming that Japanese snow differs from European snow!
Progress is possible, but a comprehensive reduction of trade obstacles in 40 days—or even 9 days—is likely ‘Mission: Impossible’ territory, especially with the involvement of member states, which is unavoidable.
The two parties cannot even agree on the extent of the trade surplus the EU holds over the US.
Discrepancies exist in both sides’ calculations regarding the trade surplus, particularly in the services sector.
The EU’s figures, which account for services, indicate a trade surplus of approximately $150 billion in its favor, a gap they intend to close by increasing imports of US energy, especially Liquefied Natural Gas (LNG).
Conversely, the Americans estimate the gap at roughly $250 billion—excluding services, where they dominate and are seeking further access into the EU market, especially in financial services.
While the EU does require a more dynamic financial services sector capable of mobilizing capital efficiently, the question remains: is it prepared to relinquish regulatory control to the US, particularly where the Trump Administration is loosening such controls?
The EU certainly requires reform, backed by extensive analysis and recommendations chronicled in the Draghi report—named after its author, former ECB President and former Italian Prime Minister Mario Draghi.
Meanwhile, French Hill, Chair of the House Financial Services Committee, recently appeared on CNBC, referencing the Draghi report and urging the EU to seize the opportunity for change.
It’s possible that the Trump tariffs could serve as a catalyst for necessary reforms within the EU, albeit with potential political costs at home.
However, if the consequences of failing to implement those changes are 50% larger and immediately pressing (like by June 1), then perhaps Donald Trump will inadvertently be doing Europeans a favor by pushing them to take action. After all, a higher rate of EU growth would generate the resources required to purchase more high-cost goods produced in the US.
To quote founding father Jean Monnet, “Europe will be forged in crisis, and will be the sum of the solutions adopted for those crises.” Or, to clarify for our American readers, the often perplexing nature of the EU’s operations is a feature, not a flaw.
