The European Union (EU) is in an equally dark predicament. It needs to thread the needle of a burgeoning trade war with the United States. The US has hit China with tariffs above 50% on their imports. Simultaneously, it is pushing for the EU to adjust its digital rulemaking, but the entity appears unwilling to budge. In the face of rising hostility, the EU has to pick its move with caution, hoping not to worsen the affair.
The European Commission, which manages overarching trade matters for the EU’s member states, has been proactive in addressing the implications of US tariffs. According to reports, these consequences would be severe for the EU, even extending to the loss of EU quotas on US agricultural products. This is even more alarming for producers located in France. After all, they depend on the US market, which represents well over 40% of their brandy exports.
A recent barrage of objections from the US to the EU’s digital regulations have only further complicated the situation. The EU has shown a commitment to defend its regulatory space. First, it is just as afraid that by giving in to US demands it will create a dangerous precedent for its own interests.
French President Emmanuel Macron emphasized caution in engaging with the US, stating,
“not to invest in America for some time until we have clarified things.”
This new mood reflects a broader hesitation within the EU to further escalate tensions with Washington. Simultaneously, the EU has an interest in maintaining its own high regulatory standards.
As the EU decides its course of action, it seems determined not to rush into retaliation against US tariffs. Rather, it should pursue other, more effective strategies to address and rebalance our trading partners’ trade-distorting practices. One not-so-plausible possibility is to increase imports of US liquefied natural gas (LNG). This strategy should be used to address the ongoing goods mismatch. Moreover, negotiations have begun on expanding the eligibility to procure US-made military equipment.
Maros Sefcovic, the EU’s trade commissioner, is scheduled to start talks with his US counterparts this Friday. These discussions are likely to be about how to tamp down mutual requirements for retaliatory action, as trade tension continues to heat up.
The broader economic context in which these discussions are taking place can’t be overstated. America’s outsized influence on the world stage is strongly correlated to its economic prosperity. Germany, however—for everyday Germans, this impact is keenly felt, as American markets account for more than 5% of Germany’s GDP. The EU now has a roughly $200 billion trade surplus with the US, projected to be about that much in 2024. As this figure clearly emphasizes, having a predictable and stable trading relationship is key.
Experts don’t think that the EU’s most potent weapon against the US entails goods at all. Rather, it lives in services. The financial sector and big tech are key spaces European companies can already have a tangible impact on. By fully using these two sectors, the EU could negotiate harder without raising tensions to new heights.
Amidst all these dynamics, the EU is trying to play a long-term game in a smart and prudent fashion. The threat of new tariffs or restrictions hangs heavy in the air, but officials are interested in pursuing diplomatic remedies before taking drastic steps.