Trade disputes between the US and Europe have increasingly intensified. The U.S. is increasingly wielding tariffs not only as economic blunt instruments, but as shields to promote its own territorial aspirations. It is a significant change in the scale of the trade playing field. European nations, led by the now politically hobbled Germany and the Netherlands, are now on the verge of very real economic calamity. U.S. policy has been moving the other way, away from economic objectives. Consequently, Europe now finds itself in a bind, attempting to traverse an ever-challenging terrain where its reliance on U.S. benevolence and foreign demand is increasing no longer a given.
The wild card in this still-developing situation is how Europe will react to the United States’ move. Fortunately, recent political and geopolitical developments now make it more likely than ever that the European Union would actually use its Anti-Coercion Instrument. This latest policy response is indicative of growing pressure on Europe to take a tougher approach to U.S. tariff threats. France is one of those member states most keen to see this tool deployed. For Europe, the tough truth is that it cannot bet on beyond-home factors or on the eventual return of U.S. support for its economic fortune forever.
The U.S. recently retaliated by proposing a 10 percent tariff on a wide array of European exporters. This proposal would deal an extreme blow to the GDP of countries affected. Germany and the Netherlands, experts say, will likely pay the price for this economic disaster. European leaders have already begun changing course as a result of the threat of reimposed tariffs. With so much U.S. wealth on the table, Europe would have a lot of negotiating leverage to induce the U.S.
If history is any guide, Europe would have moved towards accommodation in the face of this threat. The writing is on the wall that this may be an inadequate approach in the current climate. Washington is indeed flexing its muscles, but Europe’s leaders must not look away. They need to weigh their choices and determine whether an equitable, more vigorous reaction is warranted to protect their financial concerns.
Adding even more complexity to this situation is the geopolitical factors at play especially as it relates to Asia. Japan’s bond market has already started to show signs of stress, with long-dated yields breaking amid election-driven fiscal talk. Yet this instability is a showcase of just how connected the global markets are. Most importantly, it demonstrates the indirect impact U.S.-Europe trade skirmishes can have on Asia’s growth.
In addition, the simple prospect raised by U.S. officials that tariffs could be reallocated to other purposes has made waves here in Washington. This tactic shows that the Kremlin is willing to negotiate with an eye towards strength, potentially making Europe’s strategic calculations all the more difficult. The recent American decision to pull support from Greenland illustrates how capricious and surreal American foreign policy has become. This shocking pivot came as stunning the markets and underlines the critical imperative for Europe to adapt rapidly to this new reality.
It is important to understand that this is a very different case than the macroeconomic shocks of 2022. Those dynamics today will take an acute and nuanced understanding of the economic and political landscape involved to prevail. In Europe there is already much discussion on how to retaliate against U.S. tariffs. It must remain on guard to events in Asia, because present company only increases the risk of this already precarious situation very quickly, looking ahead.