Opinion: Preparing for Trump's new tariff era.

Authored by: Iris Groenendijk and Lilian Retel

"Our allies have taken advantage of us, more so than our enemies." Trump

The president-elect remains sceptical of multilateral alliances, including trade agreements. This time, his 'America First' stance and unpredictable nature come as no surprise, nor does his willingness to act on his statements. He maintains that there is a persistent lack of reciprocity towards the USA. Trump intends to prevent other nations from what he sees as taking advantage and prioritises American interests, resulting in a more mercantilist approach focused solely on domestic welfare. A key feature of mercantilism is the use of tariffs – and Mr. Trump is an enthusiastic proponent. If he follows through on his promises, U.S. tariff levels could potentially reach 17.7%, marking the highest rates since 1934.

"Tariff is the most beautiful word in the dictionary. More beautiful than love, more beautiful than respect." Trump

One of his proposed policies is the 'Trump Reciprocal Tariff Act', which mandates that any country imposing tariffs on American goods will face equivalent measures in return. As the new president phrased it: "An eye for an eye, a tariff for a tariff". However, countries need not impose tariffs first to face them from the USA. During his campaign, Trump repeatedly discussed a 'blanket tariff' – broad levies on all goods from specific countries. His focus appears to be on China, with a potential tariff of 60%, and on Europe with tariffs ranging between 10% and 20%. This would mark a significant shift for Europe, where most products currently benefit from "Most Favoured Nation" status, resulting in low or zero import duties. Present tariffs average only 3% to 4%, even without a trade agreement.

"The higher the tariff, the more likely it is that the company will come into the United States and build a factory." Trump

A primary goal of these tariffs is to protect and rebuild American industries. The new president aims to encourage companies to establish manufacturing facilities in the USA. and has expressed intentions to severely impact European industry. Trump particularly focuses on the automotive sector. Even before the election, his comments had a significant impact – when he warned Europe that "they are going to have to pay a big price", shares of BMW, Mercedes, and Volkswagen dropped by 5% to 7%.

Even if businesses relocate their factories to the USA, they will likely face rising costs. The high tariffs will increase the price of imported materials used in production processes. This is precisely why American citizens and companies will bear a substantial portion of the costs arising from this Trump policy.

European response

Following Trump's first term, the EU is prepared to take his tariff threats seriously. In 2018, the U.S. introduced a 25% duty on European steel and a 10% duty on European aluminium. At the time, the EU responded with largely symbolic tariffs on items such as Levi's jeans. The world is now bracing for a potential trade war, as both Europe and China will likely respond with countermeasures to the anticipated tariffs. The European Union is already preparing pre-emptive actions while still hoping to negotiate a trade deal. If negotiations fail, the EU may target products important to USA. Swing states that play a vital role in American elections, aiming to influence the midterm elections against the Republicans.

On a more positive note, Trump is known for his interest in deal-making, leaving nations, economists, and businesses wondering about the seriousness of his threats. The blanket tariffs may be merely part of his negotiating strategy. This would be fortunate, as with a cold trade war with China already in progress, Europe's ability to manage an intense trade conflict with the USA. remains uncertain.

Economic impact

The uncertainty surrounding the next four years is already negatively affecting the European economy. The USA is a major export market for countries like the Netherlands, adding pressure to an already stagnating economy. For 2024, the predicted economic growth of the EU is only a modest 0.9%, compared to the USA economy's projected expansion of 2.6%.

Beyond higher tariffs on European goods, another threat looms. The high tariffs on Chinese products may cause these goods to flood the global market, increasing competition for European manufacturers and possibly necessitating additional anti-dumping measures to protect the European market. This effect is particularly evident in the Electric Vehicle industry, and Trump's promise to ban Chinese cars will only exacerbate the situation.

Looking ahead

There is hope that this new political landscape will ultimately unify Europe and reinvigorate its stagnating economy. Competing with both the USA and China requires a robust European economy. As Italy's Prime Minister Meloni put it: "Don't ask what the U.S. can do for you, ask what Europe should do for itself". However, with the two largest European economies, Germany and France, both facing political turmoil, this may prove challenging. In conclusion, both the European Union and businesses should prepare for an unprecedented period of volatility in global trade.

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