Trump's tariff threats spark EU trade war fears

"I told the European Union that they must make up their tremendous deficit with the United States by the large-scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!," Trump posted in December on the social media site Truth Social.

The deficit is indeed large. In 2023, European Union countries exported goods worth 502 billion euros to the USA, while imports from the USA to the EU reached 344 billion euros. As a result, the EU registered a trade surplus with the USA, amounting to 158 billion euros.

A 10-20 percent tariff imposed by the USA on imports from the EU, followed by EU retaliatory tariffs, could lead to considerable losses for European countries. Trump aims to support domestic production, even if it is less competitive than foreign products.

The announcement of tariffs has sparked fears of a trade war in EU capitals. Analysts suggest this is a realistic scenario. However, there are voices in Brussels that believe tariffs and a trade war can be avoided. A potential bargaining chip for Brussels in talks with Trump could be the import of LNG, or liquefied natural gas, to the EU.

Trump uses tariff threats to achieve other political goals. In the case of China, it is about weakening the country's economy. With Canada and Mexico, it's about reducing immigrant flows or drug smuggling across the border. Regarding Europe, Ukraine is one of the aspects of mutual relations. Still, Trump has other areas where he seeks concessions, said Jacob F. Kirkegaard, an expert at the Brussels think tank Bruegel, in an interview with PAP.

The United States is currently the largest supplier of LNG and oil to the EU. This import increased over the last two years after Russia attacked Ukraine, significantly reducing Russian energy supplies to the EU.

Despite several EU sanctions imposed on the Kremlin, Russian LNG still reaches European terminals. Further restricting gas imports from Russia could create more opportunities for American companies to export raw materials. This might persuade Trump that initiating a trade war with Europe is not beneficial.

The stakes are high because the 502 billion euros of annual exports from the EU to the USA include machinery, electronic equipment, cars and car parts, pharmaceutical and chemical products, and luxury goods. These exports also represent millions of jobs in European industries and substantial tax revenues for EU nations.

Although an agreement is possible, experts agree that the EU should not wait on Trump's decisions but should be prepared for a negative outcome.

According to Bruegel analysts, the EU should first engage in diplomacy and propose increased LNG imports or purchases of military equipment in exchange for the US refraining from imposing tariffs. The EU could also consider lowering tariffs on car imports from the USA.

Besides offering incentives, there must also be a deterrent. Analysts suggest a "credible threat of retaliation" is necessary. The European Commission should prepare a list of US products imported to the EU that could be subject to the same 10-20 percent tariffs as potential retaliatory measures. However, items the EU relies heavily on should be excluded from this list.

Secondly, the EU should maintain and strengthen the current trade system based on World Trade Organization (WTO) principles, as this organization can be approached for arbitration in trade disputes.

Finally, experts recommend that the EU expand its trade agreement network, especially with Mercosur, the United Kingdom, Switzerland, and regions in the Indo-Pacific and Africa.

Europe must respond firmly yet cautiously. Retaliatory tariffs could escalate tensions, but submitting to demands could set a dangerous precedent, said Charles Grant, director of the Centre for European Reform, as quoted by the "Times".