Trump apparently got what he wanted from the EU: a 15% tax on all US imports from the EU (50% for steel and aluminium), no retaliatory tariffs on US exports to the EU, no EU tax on digital companies (Apple, Meta, Google and so on), no EU regulation of the US tech giants, and an EU commitment to buy more oil, gas, agricultural products and military equipment from the US. Plus some more vague promises (for example to invest 600 billion dollars in the US economy). The deal was not a formal treaty but rather a 'joint statement' (a sort of 'memorandum of understanding'), and as if Trump didn’t trust this joint statement he declared a couple of days later on social media ‘I put all countries with digital taxes, legislation, rules, or regulations on notice. Unless these discriminatory actions are removed, I (...) will impose substantial additional tariffs on that country’s exports to the USA.’
As mentioned in my previous article, what counts in a trade war in the short run is each rival’s capacity to inflict immediate damage on the other, and in the longer run each rival’s strategic patience to endure short term pain in order to obtain longer term benefits from taking a stand.
Let us first look at the trade dependence – or rather interdependence. The EU countries exported in 2024 for 864 billion Euro to the US (530 in goods and 335 in services). This corresponds to around 4.8 % of the EU GDP that year. The US has a deficit in the goods trade with the EU, but a surplus in the service trade. Overall, the EU trade surplus with the US was in 2023 according to EU data around Euro 48 billion. That is a negligible 0.2% of the US GDP.
In the hypothetical case that EU trade with the US suddenly stopped completely, the impact would therefore correspond to 4.8% of the EU GDP, and around 2.2% of the US GDP. That is of course not a likely case under any circumstances as it would completely disrupt the supply chains between the two economies, and the negative effect would be much bigger for both. But it gives us an idea of the interdependencies. In a trade war, both parties would of course try to target trade in areas that affect the other more than itself. The US could for example stop the import of cars from EU, and the EU could stop the import of US military equipment or taxing or cutting off payments for intellectual property to the US. Truth is that both parties have a considerable capacity to hurt the other.
The EU has a Anti-Coercion Instrument sometimes refereed to as their ‘bazooka’, which can be used in for example trade wars. The EU decided not to use it in the conflict with the US. Photo is AI generated.
The EU, contrary to Trump, would of course be bound by legal restrictions, but it actually has a suitable legal instrument it could use, and which Reuters calls the ‘nuclear option’ and others 'the bazooka': the 'Anti-Coercion Instrument' approved by the European Parliament in 2023 (with the aim to be able to punish China!). This instrument (which only requires a qualified majority of the EU members), indicates that ‘if a third country resorts to coercion,’ the instrument enables the bloc to respond, ‘where possible through dialogue and engagement, but also – as necessary – through response measures.’ It can go beyond retaliatory counter-tariffs, allowing for import and export restrictions on goods and services, but also on intellectual property rights and foreign direct investment. It allows the EU to impose various restrictions on access to the EU market, notably to public procurement, as well as the ability of foreign suppliers to sell food and chemicals in the bloc.
However, the EU chose as mentioned not to fight and to give in instead, despite that it has quite a lot of strong cards it could have played (to stay in the poker language that Trump likes so much). Why is that?
There are several reasons.
Firstly, the EU has other priorities, which weigh more than economic growth, employment and its citizens’ wellfare: first of all Ukraine. The EU has decided that Ukraine winning the war with Russia is critical to the union's survival. Sounds crazy to me, but that is how the EU politicians and bureaucrats see it. They fear that if they antagonize Trump, he will stop the delivery of weapons to Ukraine (he has already stopped further funding, so the US weaponry has to be acquired by the EU and other NATO countries). To this comes that the EU depends heavily on the US and the around 84,000 US troops stationed in Europe when it comes to its security (from Russia, I suppose). The fear is therefore that a trade war with the US could lead Trump to cut down the US military engagement in the EU (or pull out completely, even if that is highly unlikely).
Secondly, a trade war will affect the EU countries differently, according to their dependence on trade with the US. Some are more exposed (as Germany and Ireland), while others have very little trade with the US (most of Eastern Europe). It will therefore be difficult to reach an agreement on the countermeasures. Furthermore, industry lobbying is strong in the EU. It is thus said that Volkswagen, which has a lot to lose if the US market is closed to cars from the EU, has been instrumental in getting Germany to take a stand against a trade war. There is thus a lack of internal coherence within the EU.
Volkswagen exported around 380,000 cars to the US in 2024. It has been lobbying hard to get EU to avoid a trade war. Photo from Volkswagen.
If we look at the longer term effects of giving in to the US, the picture is sombre.
The decision to blindly follow US sanctions and trade policy has cost the EU dearly.
There is of course the abandoning of cheap Russian oil and gas and shift to expensive and dirty LNG from the US and oil from far away countries, which has led to elevated energy prices compared to the US or China. The US-sponsored blowing up of the North Stream gas pipeline to Germany has helped to achieve this shift. The average cost of electricity per kWh for the industry is in the US 0.096 dollars, in China 0.088 dollars and in the EU 0.22. The average cost of natural gas per kWh for industry is in the US and China around 0.05 dollars, while in the EU it is between 0.08 (Bulgaria) and 0.18 dollars (Sweden). This has led to a decline in energy heavy industries in the EU, among these the German chemical industry, a decline that may be irreversible.
More importantly, while the EU has strong positions within several high-tech sectors (as chips production equipment and the pharmaceutical industry), is is lagging behind in a number of them, among these artificial intelligence, semiconductors, space technology, electric vehicles and so on, and the submission to the US policy has made the situation worse. When compared to the US, the largest US technology companies are 20 Times Bigger than the EU's, and when compared to China, China’s industrial policy and planning is much more efficient that the EU's. It is often said that what the EU is good at, is regulating. But regulation in itself does not provide technological leadership. As I have stated before, what happens is that the EU since the eighties has changed from a developmental to a neoliberal project. The US has undertaken industrial policy to compete with China for technological leadership, both under Biden (for example the “Chips Act” and the “Inflation Reduction Act”) and Trump ( coercion of domestic as well as foreign tech firms to move production to the US). These policies have impacted negatively on the EU, and have lead quite a lot of bigger EU firms to invest in the US instead of the EU in search of subsidies, less regulation and, recently, to avoid US tariffs on their products.
There are a lot of chips in modern cars. The Chinese-owned Dutch chip company Nexperia produces many of them. On the photo the NBM7100ABQ battery management chip. Under pressure from the US, the Dutch Government decided to take over the management of the company. This lead the Chinese to stop the supply. Big surprise.
The recent farce around Nexperia, a Chinese-owned chip company in Netherlands, tells us a lot about the relation between the US and EU. The Dutch government recently seized control over Nexperia, a subsidiary of the Chinese company Wingtech, which had bought the company in 2019 and integrated it into its operations in China. Nexperia chips are vital for the European car industry. The result was a disastrous stop for supply of Nexperia chips to the car industry. Even if the Dutch Economy Minister insists that he was under no pressure from the US to do it, few believe him. As part of the temporary truce in the China-US trade war, Wingtech has restarted delivery of Nexperia chips to the car industry for a 12-month period. How this move by the Dutch government should be beneficial to the EU economy is difficult to understand. But of course, there is no significant car industry in Netherlands, so maybe that is why they care more about their relation with the US than about the European car industry. No wonder the EU is so weak in the trade war.
The EU has furthermore suddenly discovered that it is totally dependent on US companies in cloud services, where EU companies and even governments depend on providers as Google, Microsoft 365 and Amazon Web Services, which together control nearly 70% of the European cloud market. To this comes that most of their own computers and servers are dependent on US software (Microsoft, Oracle, Google and so on). Even the European Commission’s own cloud operations are almost entirely dependent on US providers, leaving the EU’s daily operations exposed to the threat of US sanctions. Many EU governments, including Denmark, use almost exclusively Microsoft platforms for administration, including “Microsoft Teams” for communication, despite that Microsoft by law is forced to give the US security agencies access to the data. Sweden has for the same reason decided not to use it (I don't know whether they actually have succeded in this). This means that when European politicians and government officials talk together, the NSA is listening (as Edward Snowden told us).
This dependency on US cloud services is a strategic risk, as cloud services and software are subject to export controls, sanctions, and political mandates that can override customer agreements. Independently of whether the US President is Trump or somebody else. Just ask the Russians.
These EU weaknesses are not impossible to overcome in the longer run with an intelligent industrial policy based on regulation and targeted subsidies. But the very fact that the EU has given up to US pressure in the trade war makes this very difficult, if not impossible. Apart from some hand-wringing here and there, there is no sign that the EU countries are going to do anything seriously about it.
The priorities for EU now are Ukraine, EU enlargement, and rearming. To hell with the rest.
And so it will be.
