Faced with a tariff threat, Europe looks for ways to appease Trump

The European Union considers options to appease Donald Trump upon his return to the White House. It is bracing for a resumption in U.S. trade threats and tariffs, as well as a tough exchange on how to deal with China.

Trump warned the 27-nation group shortly before he won the U.S. presidency that they would "pay a high price" if they did not buy enough American exports.

EU officials claim that Brussels has acknowledged the credibility of threats to impose tariffs of 10% on all imports from the United States and 60% on those coming from China.

The European Commission is already modeling the impact of the Brexit on the EU as a bloc and the nations that are likely to be the hardest hit. These could include Germany, a major auto producer, and Italy as the second-largest EU exporter to America.

EU diplomats report that some governments, though they may not have been outspoken, expressed their anxiety before the elections.

The EU may also suffer a second blow, as Chinese exporters, who are facing higher barriers in the U.S. market, could increase their exports to Europe.

As a response to Trump's tariffs on EU Steel in 2018, the EU implemented safeguard measures to limit tariff-free imports to its markets. These measures expire on June 20, 2026. No extension is possible under EU or WTO regulations.

The EU is preparing to reach out to the Trump administration in advance of his inauguration. It has already begun examining future areas for cooperation that may ease or remove the threat of tariffs.

The EU can import more LNG from the U.S. in order to reduce the trade deficit, which is of concern to Trump.

Doing Business with TRUMP

In 2018, Trump, then EU chief executive Jean-Claude Juncker and the EU agreed to a deal which included an EU desire to import more U.S. LNG. This helped to avoid new tariffs on EU products beyond steel and aluminum. Brussels hopes Trump can prove to be a president with whom it can work again.

EU officials are of the opinion that increased LNG shipments from the U.S. could be a result of investments in the EU for diversifying energy supplies, especially after Russia's invasion and occupation of Ukraine.

The EU wants to "de-risk", but not to decouple, China. Discussions will be difficult because of the EU's desire to adhere to global trade laws and "decouple" from China.

The Trump presidency will have major implications for Europe. It faces the challenge of financing welfare spending to support an ageing population with modest economic growth.

If Trump withdraws his support for NATO and the Ukraine War, Europe will have to increase their defence budgets to cover the increased costs. Their budgets are already stretched due to national debt levels of close to 90%.

If Trump's plans are implemented, they will likely have a negative impact on European growth, and lower inflation. This is especially true if the manufacturers, who are already in a long industrial recession, begin to reduce their workforce.

Deflationary pressures could be exacerbated by increased imports from China, as well as more U.S. coal and oil production.

Trump's inflationary duties and higher deficit will strengthen the U.S. Dollar, which will allow the U.S. to export some of their own inflation. However, this will not be sufficient to offset other factors affecting prices.

This could force European Central Bank to reduce interest rates below 2% in the next year. It will stimulate growth again after several years restrictive policies. (Reporting and editing by Andrew Cawthorne, Mark John, Balazs Koranyi. Additional reporting by Mark John, Balazs Koranyi.

(source: Reuters)