By Gavin Everson
Europe is preparing for war – a trade war, that is. A two-front trade war. And it’s not one the continent will win easily.
With the election of Donald Trump as president of the United States, the European Union and United Kingdom are both preparing for what is anticipated to be a protracted conflict that will create diplomatic tensions, raise the price of consumer goods, generate economic downturn and have far-reaching consequences on businesses on both sides of the Atlantic.
The heart of the matter
That president-elect Trump intends to impose tariffs on America’s key trading partners is no secret. Not only the president-elect himself but Republican insiders have stated repeatedly their desire to impose universal tariffs of 10-20% on all imports. History shows their protectionist scope tends to be aimed squarely on trading partners who enjoy a trade surplus with the U.S. This doesn’t bode well for Europe. The EU is set to make 2024 a record-breaking year for its trade surplus with the U.S. Trade figures to the end of September 2024 show a current surplus of $173.5 billion, putting the trade bloc on track to hit a surplus of $230 billion, exceeding the previous record of $218 billion set in 2021.
For Germany, often described as the EU’s economic engine, the numbers don’t look much better. Trade data to the end of September 2024 show a trade surplus of $63.8 billion, putting the country on track to exceed its 2023 record of $83 billion. Not only does Germany boast a handsome trade imbalance with the U.S., but its auto sector has long been a target for Trump administration officials. In the first seven months of 2024, Germany auto exports to the U.S. totalled $20.9 billion while imports from the U.S. totalled only $6.1 billion. In short, Germany and the EU as a whole have a target on their back.
Accelerated timeline
There’s no telling at this point precisely when the Trump administration will impose tariffs, or what the tariff rate might be, or even if it will in fact be universally applied as the campaign has suggested. However, tariff discussions with the EU will come to a head in March irrespective of Washington’s plans. The bloc’s moratorium on $6 billion in retaliatory tariffs against Washington’s steel and aluminum tariffs expires in March 2025, and without a negotiated settlement, will be reinstated. That will put the two entities on a course for collision within weeks of Trump returning to the White House.
Most impacted countries: Germany and Ireland
Economists generally agree that putting a definitive impact on Trump tariffs is premature. The scope, breadth and rate of the tariffs is still very much ambiguous, leaving far too many unknown variables. Still, German economists say the country should brace for a GDP loss of more than €127 billion if the Trump administration imposes a universal 10% tariff, assuming the EU retaliates in kind, and up to €180 billion if the universal tariff rate is 20%.
The tariffs present an acute threat to the German economy, which relies on exports for more than half of its GDP and for which the U.S. is the principal export market. But Germany is not alone within the EU in its trade surplus with the U.S. Ireland, a key exporter of pharmaceuticals, has also seen its trade surplus with the U.S. grow from $55.3 billion in 2020 – Trump’s last year in office – to $65.5 billion in 2023, a 19% increase in just three years. Trade figures for 2024 suggest the trade surplus will grow substantially as Ireland’s trade surplus had already reached $62 billion by the end of September.
Spotlight on the UK
When Trump left office, the UK was barely out of the woods on the Brexit transition. Nevertheless, the Trump administration had expressed some desire for a potential U.S.-UK trade deal. Hope for such a deal was promptly shelved once the Biden administration took over, citing the Northern Ireland Protocol and its threat of re-igniting sectarian violence in Ireland as a deal breaker.
Now back in office, the Trump administration faces a new British government led by Labour, but one still hopeful a U.S.-UK trade deal – considered by the pro-leave camp as the crown jewel of Brexit – could be struck. Whether or not that’s the case will depend largely on the Labour government’s willingness to concede to some of Washington’s core demands, namely access to the National Health Service (NHS) and the ability to sell chlorine-washed meats in the UK market where such products are currently prohibited.
Conversely, failure to find common ground would result in the full impact of the tariffs being proposed by the Trump campaign, which are estimated to cost the British economy 0.8% in economic output and a £22 billion or 2.6% decline in exports. The fishing, mining and petroleum industries will be particularly hard hit.
A two-front war
It isn’t just the Trump campaign’s universal tariff that is causing angst in Brussels and London. It’s also the threat of a 60% tariff on imports from China. In his first term as president, Trump imposed a 25% tariff to discourage importers from relying on China and encourage them to produce domestically. Instead, many importers absorbed the 25% tariffs, passing it down to consumers and exacerbating the inflationary trend, while others simply transplanted location to nearby locales, such as Vietnam, Thailand and the Philippines. The universal 10-20% tariff is designed to discourage the transplanting of production while the 60% tariff on China is designed to push those who chose to keep production in China to stop doing so quickly.
But the residual impact on Europe is significant. Faced with steep tariffs and a decline in U.S. buyers, Chinese producers may turn their attention to Europe and flood the European market with Chinese goods at below-market prices. This would reduce European producers’ competitiveness within the continent and put pressure on the EU’s and UK’s economic performance. It would also push the EU – which has witnessed significant infighting on how to deal with China’s economic rise – toward a more protectionist stance against Beijing. This is already evident in the EU’s recent tariff of 35% on Chinese electric vehicles, which comes on the heels of Washington’s imposition of a 100% tariff on Chinese EVs. In short, it could push Brussels and London into a two-front trade war with Washington on one side and Beijing on the other.
Considerations for business decision makers
Greater continental integration: Much to the chagrin of those in the UK who preferred to break ties with the EU, the most obvious contingency plan to Washington’s protectionist overtures may be greater buying and selling across the English Channel. The current EU-UK Trade and Cooperation Agreement allows for essentially the same degree of liberalized trade between the two entities as existed in the pre-Brexit period. The catch is the associated administrative burden. The documentation to take advantage of duty exemptions is extensive and requires ongoing adaptation to changing regulations and processes. Businesses engaged in import and export across the English Channel that have not yet invested in robust trade compliance should do so as soon as possible.
The devil is in the details: It has been said often that the trade proposals put forward by the Trump administration are more conjecture than substance; that the president is simply putting America’s trading partners on the backfoot in hopes of compelling them into making concessions. Should this prove to be true, it is quite possible tariffs may be applied only to certain products or industries. Importers and exporters should watch closely the negotiations that take place and look for reference to specific products or industries. Those who may be impacted should consider how to adjust their supply chains to mitigate the financial impact and associated logistical challenges.
The other sourcing conundrum: One of the bargaining chips both Brussels and London can yield to avoid the worst of a trade war with Washington is the promise of a united coalition against China. Washington has long looked to isolate China and take it to task for practices that are in breach of free-market principles and World Trade Organization requirements. A pledge from the EU and UK to join the U.S. in this coalition could protect them against U.S. tariffs, but it would also mean the UK and EU engage in protectionist policy against China. That would mean higher costs for importers who rely on Chinese goods and likely diminished competitiveness in their exports to China should Beijing choose to retaliate. European and British businesses with strong reliance on Chinese suppliers should consider investigating suppliers elsewhere, including Vietnam, Thailand, India and even South America (with which a trade agreement of the continent’s largest economies is still being negotiated). Exporters to China should consider alternative markets where burgeoning middle classes have increased spending power, including India, Indonesia, Bangladesh, Vietnam, Pakistan and the Philippines.
Stay nimble: Today’s reality is that the protectionist policies being espoused in Washington are not the exclusive domain of the Republican party. On the contrary, the Biden administration simply carried forward the tariffs brought in by the first Trump administration and recently elevated the tariff rates on certain Chinese imports. In other words, protectionist policy isn’t going to go away anytime soon. Businesses in Europe should consider that the direction of this protectionism could come in waves and shift and divert in response to any number of economic and/or geopolitical factors. As such, supply chains should be designed to be responsive to those changes. Injecting redundancy into supply chains and evaluating an ever-growing list of international markets for expansion of sales will be critical to future success in global trade.
Final thoughts
Near term disruption in global trade is a certainty. The only uncertainty is the extent and the impact. Trading businesses should educate themselves not just on the geopolitical forces driving these changes, but the operational impact each one has. In most cases, changes in trade policies result in regulatory shifts, administrative requirements and logistical pivots. Each of these have a financial impact, but careful contingency planning can help offset some of this impact and allow businesses to remain competitive and relevant in the world’s most sought-after markets. As the saying goes, those who fail to plan, plan to fail.
Gavin Everson has more than 35 years of experience in customs, international trade and logistics management, particularly in implementing customs and logistics processes and systems. He has responsibility for advising and delivering Customs solutions to Livingston’s European clients.