Trump’s Tariffs Spark Alarm in Europe

There may be confusion on European soil about the intentions of US President-elect Donald Trump, but Bloomberg gives another dimension to how Europe will respond to the possibility of tariffs being imposed on European goods imported by the US.

Already, Trump’s statements, especially the words he uses, are under the microscope of markets, which are trying to diagnose whether, and to what extent, the US president will use US trade as a means of exerting pressure on foreign policy.

His threat to hit Canada, China and Mexico with tariffs over their involvement in drug and illegal immigrant trafficking to the US sent European stocks tumbling, particularly shares of companies such as Stellantis NV and Volkswagen AG whose orders vehicles would be hit by a trade war with Washington.

“Europe needs to be prepared,” said Penny Naas, a global public policy expert at the German Marshall Fund in Washington. “Because a lot is going to come their way at some point in the not-too-distant future,” he warned.

Unprepared

Europe was largely unprepared in 2017 when Trump, citing national security concerns during his previous term as president, imposed tariffs on European steel and aluminum. The 27-nation bloc had to fight to defend its companies and retaliate.

Since then, the EU has reinvented its trade doctrine, making it more assertive and expanding its economic toolbox to deal with absolutist practices, Bloomberg reports.

“We are well prepared for the possibility that things will be different with a new US administration,” German Foreign Minister Annalena Baerbock said after a Group of Seven (G7) meeting in Italy on Tuesday. “If the new US administration pursues an ‘America first’ policy on climate or trade, then our response will be ‘Europe united,'” he added.

Tariffs and the new Strategy

The European Commission, the EU’s executive arm, adopted a new economic security strategy earlier this year aimed at using its massive single market to fend off measures from geopolitical rivals such as Beijing and Moscow, as well as allies such as Washington .

The approach sought to identify risks “arising as a result of rising geopolitical tensions, geo-economic fragmentation and profound technological changes” and create tools for the bloc and member states to address these risks.

EU member states have agreed to a new set of trade powers that will allow the EU to hit back at third countries that use economic restrictions for political payback. The new EU anti-coercion tool strengthens trade defenses and enables the Commission to impose tariffs or other punitive measures in response to such politically motivated restrictions.

The EU also adopted a so-called foreign subsidies regulation, which allows the Commission to block foreign companies receiving government subsidies and facilities from participating in public tenders or M&A deals in the bloc, among other measures.

Investors are worried

But the nervousness of the markets is obvious. The threat of a new trade war has heightened concerns that the EU is heading for a period of instability and uncertainty.

Complex supply chains mean companies in the bloc will continue to be affected by tariffs imposed in countries such as Mexico, according to Deutsche Bank’s George Saravelos. And this is before it becomes clear what Trump has in store for Europe. The latest tariff threats are an indication that they will be a key tool in policy negotiations, Saravelos warned.

“Tariffs are clearly at the top of Trump’s agenda,” he said. “We see the message that they are likely to be used as a broad-based economic and geopolitical tool in this administration,” Saravelos added.

Europe’s stock and currency markets are under pressure from the US election, with investors fearing the region will be particularly vulnerable to Trump’s political agenda. Many analysts are predicting that the euro will slide towards absolute parity against the dollar and see European stocks extending their underperformance against US Treasuries.

The tariffs

Some investors are also taking a wait-and-see attitude until there is more clarity on Trump’s policies and their impact on Europe.

“I’m a bit more cautious and don’t make big bets on Europe whether it’s stocks or bonds,” said Julius Bendikas of Mercer, which manages a total of €548bn. dollar in assets, confirming that it has reduced risk in recent weeks. “Right now there is still a lot of uncertainty and we need to take some examples from 2016,” he pointed out.

Trump has multiple grievances against the EU and has criticized Europe for not spending enough on defense and the US-EU trade deficit. He once referred to Brussels, the seat of EU institutions, as a hellhole, and more recently said he had once told a NATO member that he would let Russia do “whatever the hell it wants” to it in order to meet defense spending targets.

But Europe has more tools at its disposal to react to a trade war with the US, said Naas of the German Marshall Fund, but whether the 27 member states can remain united remains an open question. “I think the question has always been: Is Europe ready to decide on attack instead of defense?” he said characteristically.

SOURCE: ot.gr