In time of the breaking of nations: Europe’s test

The US on 2 April announced comprehensive, discriminatory tariffs on imports from all countries, ostensibly to remove its trade deficits. Through a bizarre calculation – trade deficit divided by exports divided by two – the US will penalise countries differently – the European Union with a 20% duty, the United Kingdom with just 10%, but Lesotho, the world’s poorest country, with a 50% duty.

Due to massive backlash, Trump’s ‘reciprocal tariff plan’ was postponed for 90 days, ostensibly to give countries time to negotiate, but in reality to encourage competition between countries for the ear of the White House. The exception was China, where a 145% tariff was maintained, triggering immediate retaliation.

US trade policy is that of a mafia don who will torch your restaurant unless you pay protection money.

Trump’s trade policy breaches WTO law, will hurt US consumers and workers and fuels inflation. But the key question is: how should the world react? Countries have four options: negotiate, litigate, retaliate or capitulate. Europe is the only economy with the strength and reach to organise a global response.

For the EU and many others, negotiation will not deliver mutual benefits. The EU was prepared to negotiate by buying more gas and soya from the US, and even offered a zero-for-zero deal where both sides would remove tariffs on all industrial goods. But the US does not want to negotiate in the conventional sense, but rather demands that countries unilaterally remove any perceived barriers to US exports. Smaller countries have no choice; bigger ones must resist this arm-twisting. Japan who was first up wisely walked away last week. Why should one reward the US just so that it stops behaving illegally?

Litigation in WTO is necessary. The US tariffs breach GATT Articles I and II on respectively non-discrimination and tariff bindings – but because the US decapitated the WTO Dispute Settlement System breaches of the rules are not enforceable. Despite that, countries still should take the US to the WTO court in order to secure findings of non-compliance, expose the US as an international pariah and provide legal cover for any retaliation they wish to introduce themselves.

The third option is to retaliate, as Canada and China have done, and as the EU will probably do.  Retaliation is unwelcome – difficult to do without hurting one’s own companies given global supply chains – but is the only language that might force the US to change. The EU cannot retaliate only on goods, given its surplus, so will have to impose restrictions on US service providers, e-commerce platforms, and US licenses and other intellectual property.

But the EU should not act alone. Europe is the only bloc with both the economic weight to fight the US and the credibility internationally to coordinate with partners. Just this week, President von der Leyen said that the rest of the world is asking for European leadership. So, the EU must urgently do three things.

First, convene a Summit with affected countries to decide on a common response to the US tariff blackmail. The most urgent decision is that, if countries feel obliged to negotiate i.e. meet certain US demands, any concessions made must be on an MFN basis i.e. WTO-compliant. An example: India under pressure offers to reduce its tariff on US whisky from 150% to 100%. Fine, but it must apply to all whiskies not just US ones, or else India is in breach of WTO obligations and puts non-US exporters at an unfair disadvantage.

More generally, countries must take no action that harms the interests of others. That includes rejecting US demands to penalise China. Solidarity and not divide and rule, must govern their actions.

This is not just about respecting WTO obligations, it is about rejecting the US illegality script. Countries, when responding, should not themselves breach international law. Trump must not normalise such behaviour.

The second EU action should be to coordinate targeted retaliation with those countries who choose the retaliatory route. Smart retaliation would mean the major economies targeting the same products and services so the US loses all its key markets. And, taking a leaf from the US’s own playbook, countries could introduce a ‘carousel’, changing the products or services targeted every three months, to maximise pain and increase unpredictability for US Republican States and companies. The EU should convene a meeting with the Trade Ministers of Canada, Mexico, Japan, China, ASEAN countries, Australia, Brazil, South Africa and others to agree on a coordinated retaliation list.

Thirdly the EU must rapidly conclude a plurilateral Free Trade Agreement (FTA) between affected economies, so as to expand trade and be less US-dependent. Last autumn in this journal, I argued that the world needs a 21st-century equivalent of the Congress of Vienna to establish a new economic order. Several commentators have picked up this recently, with calls for increased ‘cooperation’ between Europe and other countries, or even a ‘Committee to save the world’. The minimum should be for the EU to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a Free Trade Agreement grouping several ASEAN countries, Japan and Korea, Australia, New Zealand, the UK, Canada, Mexico, Costa Rica and others. China should be persuaded to join.

The EU already has, or is negotiating, FTAs with all CPTPP members. Since the CPTPP market access commitments are shallower than those in the EU’s FTAs, membership will technically not be difficult. It can in parallel continue to negotiate deeper arrangements with individual members like Australia, Malaysia and Thailand. And in a far-sighted move the EU can propose to expand CPTPP by adding its existing Agreements with Latin American, African and neighbourhood countries.

This inter-regional FTA comprising two-thirds of global trade would lessen the impact of US tariffs, create alternative markets, and isolate the US. ‘America Last’, let’s say.

The EU therefore needs to act urgently in these three ways. This will require a degree of political will, speed and unity – all of which have been in short supply in recent years, but which today’s circumstances make necessary. Can it, to quote the poet Thomas Hardy, prevent “the Breaking of Nations”?

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.