Last Friday, (May 23) US President Donald Trump slapped a staggering 50% tariff on European Union goods, which will take effect from 1 June 2025, unless the EU agrees to significant changes in its trade policies. The escalation has kicked off and a diplomatic crisis destabilised financial markets.
Trump’s proposal aims to reduce the EU’s huge trade surplus with the /USA ($550 billion in annual exports to the US, compared to $351 billion in US exports to the EU in 2022) which as has long been acknowledged, is mostly due to unfair trade barriers and protectionist policies operated by the EU to restrict inward trade to the bloc. Trump's outrageous tariff aims to force Brussels to renegotiate its terms for trading with the USA.
The announcement is the latest in a list of aggressive trade rhetoric, where tariffs are proposed but sometimes softened when the target nation agrees to negotiate. The EU, the world’s largest trading bloc and an important ally of the US, now faces a reckoning over it's trade policies.
Typically EU leaders responded in their usual arrogant manner, announcing that Brussels is preparing for retaliation. Maros Sefcovic, the EU’s Commissioner for Trade and Economic Security, emphasised a commitment to a “deal based on respect, not threats”. Irish Prime Minister Micheál Martin called the tariff threat “enormously disappointing”, arguing it undermines a vital trading relationship and global economic stability. German Foreign Minister Johann Wadephul warned that such tariffs would harm both economies and urging the EU to preserve market access.
An EU press release states the bloc has already drafted $108 billion in retaliatory tariffs, targeting US goods like agricultural products and machinery. The EU counter measures include tariffs on US steel and aluminium and levies on American whiskey and motorcycles whuch show the usual bureaucratic ineptitude, while the EU, due to its 'net zero' obsession has to import metals thus EU based buyers will just have to swalllow the cost of tariffs, US exports of whisky and motor cycles are insignificant.
Trump is right when he says the EU has been engaging in unfair trade practices for decades. Since the turn of the century the European Unionhas suppressed domestic demand through policies of austerity, fiscal restraint and wage compression as well as running import policies that make selling goods to member nations very difficult for US companies. This deflationary tactic along with the euro’s inherent deflationary bias) has been a deliberate strategy aimed at bolstering price competitiveness on the global stage, while at the same time reducing imports.
In effect, the EU has embraced a hyper-mercantilist, export-driven growth model, prioritising trade surpluses over internal economic development.Rather than get into a trade war with the Trump2 administration EU economists need to ask themselves what exactly is so very wrong about an “export led economic model” ?
If you are able to successfully export your goods, it is because you are producing either better goods than other countries and/or producing them at lower prices. These are precisely what Lord Young used to call “the problems of success”.
There is of course nothing wrong with an export led economic model, provided that there is also a willingness to embrace free trade as the sine qua non for making such a model sustainable in the long run.
The problem with the EU is that it is a customs union and doesn’t believe in free trade, even frankly within its own borders (for example there has never been an effective single market in services, with all manner of national protections and barriers still in place). If you take a look at the tariff structures of the EU you’ll find that they tend to benefit the economic bases of the four biggest players; Germany, France, Italy and the Netherlands.
It also doesn’t believe in entrepreneurship or free market capitalism preferring instead corporatism and excessive, stifling regulations to sustain that. The consequence of this being aside from agricultural, basic commodity and legacy goods, the EU is getting left behind the rest of the world in terms of developing new technologies (EV’s, batteries, silicon, gene editing, AI, communications, electronics etc etc) and its becoming increasing hard to maintain any competitive advantage in the areas where it does export.
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