Trump's trade whims strengthen EU's hawkish camp

Reuters

29-05-2025

BERLIN, May 27 (Reuters Breakingviews) - Even Germany is growing impatient. Chancellor Friedrich Merz warned, opens new tab on Monday that the European Union would 'need to use' the tool of trade retaliation if tariff talks with Washington fail, and hinted at targeting U.S technology groups. The German leader's statements chime with calls, opens new tab for Brussels to take a tougher stance with U.S. President Donald Trump. Such a tactic could raise objections among Europe's other large exporters. But it may also help clinch an eventual deal.
As the EU country with the largest goods surplus, opens new tab with the U.S. – 92 billion euros last year, or nearly half the bloc's overall surplus – Germany would have the most to lose from an all-out trade war. The fact Merz is moving toward the hawkish camp is therefore significant. Trump's threat last Friday to impose a 50% levy on European goods may have helped stiffen Berlin's resolve. Other leaders from Ireland, Italy and Austria – other countries with significant surpluses with the U.S. – haven't issued similar calls. But Sweden, also a large exporter, has already warned, opens new tab that the EU should hit the U.S. with countermeasures if Trump imposes a baseline 10% levy.
Even as Merz spoke, both Washington and Brussels sent conciliatory messages and agreed to put their trade negotiations on the fast track. As Merz himself acknowledged, a serious trade dispute would hit both sides. Axa chief economist Gilles Moëc estimated, opens new tab that the 50% tariffs Trump threatened last week, combined with the recent euro appreciation, could lower the EU's GDP by 2%. The dollar's weakening after the original announcement also shows that markets worry about the impact of a tariff war on the U.S. economy itself, Moëc reckons.
European governments will disagree on what concessions to make to Trump during the talks – such as pledges to buy more U.S. products – and, if the talks fail, on how hard to respond. Germany will worry about its carmakers, Italy, Austria and above all Ireland about their pharmaceuticals exports, and France, even with a tiny 3 billion euro surplus with the U.S. in 2024, will fret over its cognac trade. Yet if the leader of Europe's largest economy is willing to take a tough line, Europe will stand a better chance of keeping a united front.
A tough stance from Europe could lead to a bigger fallout, if Trump imposes higher tit-for-tat levies, as he has with China. Yet it may also increase the chance that both parties strike a compromise. That would still mean economic harm, since tariffs will end up higher than before the U.S. election. But the threat of a deeper conflict should remind Trump that the U.S. exported, opens new tab $370 billion worth of goods to the EU in 2024 – more than double, opens new tab what it sold to China. For both the U.S. and Europe, an all-out trade war is not worth the economic price.