Trade war: Is August escalation on - or will Trump chicken out?

Sky News

21-07-2025

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Donald Trump is clearly seething over the term 'TACO' (Trump always chickens out) - a phrase that has characterised financial market trading over the past few months.
It suggests that for all the president's bluster and threats during his on-off trade war to date, he rarely follows through.
When asked by a reporter about TACO in late May, as his "liberation day" escalation remained on pause, he declared it a " nasty" question and said he wanted negotiations.
Mr Trump wants a deal but to effectively bully America's trading partners into agreeing better terms.
It's a playbook that has defined his time in the White House and, as things stand, more than 20 nations and territories, including Japan and South Korea, face heightened tariffs of up to 40% on their exports to the US from 1 August.
Financial markets don't really believe it. Stock markets, for example, are still hovering near or at record levels in both the US and in Europe. TACO is ingrained in those values.
But are markets are in for a shock, especially when it comes to the fight with America's single largest trading partner, the European Union? It was created, Mr Trump has previously claimed, to "screw" the United States.
It's fair to say there was great optimism in the EU earlier this month that a deal, similar to that agreed between the US and UK, was looming to avert the worst of a threatened 30% baseline tariff from 1 August.
2:02
But the mood music in Brussels changed at the back end of last week and now EU diplomats are even briefing that a broader range of retaliation measures is being considered beyond additional tariffs on US goods.
The seriousness of this fight should not be underestimated.
EU figures show trade in goods and services between the bloc and the US account for almost a third of all global trade, at a value in 2024 alone of €1.68trn (£1.45trn).
1:45
EU Trade Commissioner Maros Sefcovic has warned that a 30% tariff would "practically prohibit" the bloc's transatlantic trade, according to remarks via diplomats reported by the Reuters news agency.
We're told that, even if time runs out, a truce could theoretically be agreed soon after 1 August.
Much will depend on the EU's response.
Does it go down the route taken by the UK and not retaliate, pending the conclusion of talks?
There is growing pressure on Brussels to call Mr Trump's bluff.
1:40
The EU has a package of tariffs on €21bn of US goods ready to go from 6 August. An additional package is yet to be finalised.
France is demanding US services are hit too, with even Germany now saying such an escalation should be considered.
The so-called "anti-coercion" instrument, as it's known, would also potentially allow the bloc to limit US companies' access to financial service markets in the EU.
So what happens after 1 August could be even more explosive.
But there is every reason to believe that a tit-for-tat escalation is unlikely, at least for long.
The very reason Donald Trump rowed back on his "liberation day" tariffs in April, allowing 90 days for talks, was likely the dire financial market reaction that followed news of the widespread duties.
You have a president demanding interest rate cuts (at a time when inflation is on the rise due to the impact of tariffs) in a bid to boost flagging economic growth.
Mr Trump says his trade war is all about boosting US manufacturing jobs but, at the end of the day, no powerbase of voters is going to accept a threat to the value of their investments for long.
No big US company will stand by and see its sales suffer.