EU ponders how to respond to a fresh Trump onslaught

Welcome to Trade Secrets. Another weekend with trade tension set at DEFCON 1. Last week, Trump threatened a big but ill-defined move on reciprocal tariffs. Yesterday he said he would also tax all aluminium and steel imports at 25 per cent. This sounds like reimposing the Section 232 national security tariffs he brought in during his first term but which were suspended via various deals, including one Joe Biden made with the EU. Except those had aluminium at only 10 per cent. If Trump wants to deprive his manufacturers of cheap basic inputs and invite retaliation, more fool him.

His reciprocity plan, which is wildly at odds with the steel and aluminium tariffs, probably refers to the Reciprocal Trade Act that, quaintly enough, was actually in his policy platform. In today’s newsletter I recap why it’s a bad idea that is unlikely to happen, at least not fairly and honestly on the advertised scale. I also ask if the EU, the presumptive next target of Trump’s coercive tariff campaign, could match the lightning speed with which Mexico and Canada produced retaliatory threats last weekend.

Oh yes, and Beijing’s actually quite restrained response to the 10 per cent tariff on imports from China comes in today. And in the spirit of remembering there are bigger things in life than trade policy, Elon Musk’s reckless dismantling of the US federal government last week involved the USAID development agency being all but abolished, and with it most of the US’s overseas HIV-Aids and food aid programmes. Also the US is detaching from even the basic frameworks of global economic governance. Citing this year’s G20 host South Africa’s commitment to “diversity, equality and inclusion” and combating climate change, and with Trump’s crony-in-chief Elon Musk obsessed with the plight of white South African farmers, the US won’t attend this year’s G20 summit and might also pull out of the IMF and World Bank. It’s like a fever dream. Today’s Charted Waters section, where we look at the data behind world trade, is on uranium demand.

The porosity of Trump’s reciprocity

Here’s what we know about Trump’s reciprocity plan, on which Kevin Hassett, head of the White House National Economic Council, seems particularly keen. It envisages the US mirroring its trading partners’ tariffs, hence encouraging high-tariff countries to reduce their protection if they want to maintain their current access to the US market. Even in theory it’s a bad idea. It will destroy the most-favoured-nation (MFN) basis of global trade — and as World Trade Organization director-general Ngozi Okonjo-Iweala recently reminded me, despite all the fuss about preferential trading agreements, more than 80 per cent of global goods trade takes place under MFN. It will also be impossibly complicated, involving thousands of product lines with hundreds of trading partners.

It’s also pretty clear the US either doesn’t understand the plan’s implications or is acting in bad faith. The idea is based on the assumption that the US has the lowest tariffs, so other countries will be doing the reciprocal cutting. For industrial goods trade, that’s usually true. For agriculture, it often isn’t. As I wrote previously:

According to calculations for the FT by the Global Trade Analysis Project (GTAP) at Purdue University, New Zealand dairy products encounter an average 14 per cent applied tariff (the New Zealand dairy industry itself reckons a bit higher) on sales to the US, the world’s third-largest dairy market after India and the EU.

New Zealand itself maintains zero tariffs on almost all its own dairy imports. The second-biggest dairy-producing state after California is politically sensitive Wisconsin. It’s unlikely Trump (and certainly Congress) would want to match New Zealand by cutting its tariffs to practically nothing and expose swing-state dairy farmers to low-cost competition.

It’s a similar situation with sugar. Brazil, a super-competitive exporter, maintains applied tariffs on American raw sugar of about 16 per cent, according to GTAP calculations, which it would be able to cut if that unlocked market access elsewhere. The US, which has a quota-and-tariff system, imposes duties on Brazilian exports of 44 per cent.

The Florida cane-growers are notoriously fearsome lobbyists — as president Bill Clinton interrupted time with Monica Lewinsky in the Oval Office to take a call from one of the Fanjul family of sugar barons — and a reciprocal deal on sugar is similarly improbable. There is certainly no fair and comprehensive across-the-board reciprocity plan waiting to be implemented.

And if it wants to apply this reciprocity to cars, is the US really going to cut the 25 per cent tariff on pick-up trucks that’s been there since Lyndon B Johnson was president? If the EU offers to cut its car tariffs to US levels, as the Financial Times has reported, it could put Trump on the spot by demanding that the light truck tax goes as well.

One other thing: unless Trump thinks he can do all this by executive action, a reciprocal deal will require legislation. Congress might be supine in the face of Trump’s emergency tariffs, but requiring its approval for this will mean giving the farm lobby a veto. If a reciprocal trade act passes it will be partial and hypocritical. Don’t fall for it.

Facing down Trump, the Mexican-Canadian way

Speaking of resisting bullies, what did we learn from the Canada-Mexico episode? We saw Trump suspend his threatened tariffs for a month after those governments offered him actions, in this case on fentanyl smuggling and immigration, they had already taken.

Of course, the EU and China did a similar thing in Trump 1.0, but the innovation last week is that those negotiations took place with Canada and Mexico already having made counter-threats of tariffs with incredible speed. With just a couple of days’ notice, Trump issued an executive order on the Saturday that the US would impose emergency tariffs at the beginning of the next week using the International Emergency Economic Powers Act (IEEPA). They were to be published in the Federal Register, the legal precursor to implementing them, on the Monday, and put in place at one minute past midnight on Tuesday morning.

What did Mexico and Canada do?

Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau immediately threatened retaliation. The same day as Trump’s executive order, Trudeau published a list of US exports to Canada to be hit with tariffs and Sheinbaum cryptically alluded to a plan for tariffs and non-tariff measures. The two leaders also spoke to each other over the weekend to signal a united front. Trump agreed a deal with Sheinbaum to suspend the tariffs on the Monday morning before the notice of the tariffs on Mexico had even been published in the US Federal Register, and the deal with Trudeau came early on Monday evening. It’s not clear whether the counter-threats made a difference to Trump backing down, but they can hardly have hurt.

How did they do it?

(Thanks to Orlando Pérez Gárate of the TMI law firm and Juan Francisco Torres Landa Ruffo of Hogan Lovells in Mexico City for help with this: all errors are mine.) Sheinbaum used presidential powers (Article 131 of the constitution, if you’re taking notes) to impose countermeasures arising from the fact that Trump’s tariffs violated the US-Mexico-Canada (USMCA) trade deal. The powers were granted to the president by the Mexican Congress in the 1950s on the grounds that swift executive action might be needed to react to unfair treatment. They were used once before against the US under USMCA against Trump’s tariffs on steel and aluminium, and once under its predecessor Nafta in a dispute over trucking. The president has a lot of leeway: the powers can be challenged in Mexican courts, but it would take a year or so to do it. Of course a rogue president could use the powers recklessly, but then Mexico’s a sensible, grown-up OECD country. Not like its crazy, hot-headed, norteamericano neighbour.

Canada, under its parliamentary system, used a so-called order in council — a decision taken by the cabinet using existing legal authority — to impose a “surtax” on countries whose actions adversely affect Canadian trade. This power has been criticised in the past by Canadian academics Wolfgang Alschner and Nicolas Lamp for allowing the government to act as “judge, jury and executioner”. As with the Mexican presidential powers you can certainly see how it might be misused, but it did the trick here. (Thanks to Robert Wolfe, emeritus professor at Queen’s University Canada and several former Canadian officials for illumination: ditto all mistakes mine.)

The EU tortoise lumbers into action

Can the EU do what Mexico and Canada did? During the first Trump term, the EU met the US’s Section 232 tariffs on steel and aluminium with so-called rebalancing measures, which took a couple of months. But then they had some warning, as the Section 232s themselves involve a lengthy deliberative process. The near-instantaneous IEEPA tariffs are a different matter. As my Brussels colleagues wrote recently, the EU is looking at combating them with its shiny new “anti-coercion instrument” (ACI), a tool it started to design when Trump was threatening EU member states with tariffs in 2019 for bringing in digital services taxes.

If the EU feels it’s being threatened with trade measures to coerce any kind of policy, it can deploy the ACI to authorise tariffs, regulatory changes, public procurement restrictions, whatever. The standard metaphor for the ACI in Brussels is “the bazooka”, but I’ve always thought of it as more like a special forces unit licensed to use a wide range of combat techniques. 

To be accurate, though, it’s a special forces unit bound by opaque and complex rules of engagement. Imagine a James Bond movie in which the opening bit where 007 spars with M over his assignment and gets new gadgets from Q and flirts with Miss Moneypenny and so on goes on for an hour before we get to the action.

Before using the ACI, the European Commission would first have to negotiate with the US to ask it to back down. It would then have to get member states to agree on a list of retaliatory actions, with Trump no doubt trying to bully or bribe them out of doing so.

How long would all this take? That’s really not clear. Reader, I tried. I asked commission officials past and present, lawyers, think-tankers, everyone: suppose you had immediate political and technical consensus across the EU to act, how quickly could you have ACI retaliation in place?

Perhaps numbed by the un-European concept of instantaneous consensus, no one was confident of an answer. But it definitely wasn’t a couple of days. The most optimistic answer I got was two weeks. Bernd Lange, chair of the European parliament’s international trade committee, told the FT last week perhaps (gulp) six months.

There’s a big gap in the armoury here. David Kleimann at the ODI think-tank points out that the EU doesn’t even have a rapid-response retaliation instrument in place for tariffs that severely breach WTO rules, even if they aren’t coercive as such.

“But Alan, this is the EU, why are you expecting quick results?” was the general vibe from my interlocutors. Fair enough, except we’ve been here before with the rescue lending in the Eurozone debt crisis. Adherence to procedural niceties cost a lot of time, money and human suffering. The imperative of getting ahead of the market turmoil lost out to endless debates about what the treaties did and didn’t allow, the authorities fiddling while Greece burned. 

Bottom line: the EU can’t create an immediate, credible counter-threat as Canada and Mexico could. If Trump comes hurtling out of nowhere with a coercive menace, the EU needs either to buy him out of it or rely on the uncertain credibility of promising retaliation in the future.

Charted waters

In the latest critical mineral news, the prospect of more nuclear power generation globally plus geopolitical uncertainty is likely to drive demand for uranium sharply higher.

Trade links

• The EU is looking at exempting more than 80 per cent of EU companies from its carbon border adjustment mechanism in an attempt to reduce the bureaucracy involved.

• The farmers in states such as Iowa who mainly voted for Donald Trump are once again threatened by the damage caused by his tariffs. There’s no telling some people.

• Trump claimed that the Japanese company Nippon Steel had dropped its controversial bid for US Steel, but it seems quite possible that something with a similar effect to an acquisition but a different name will happen anyway.

• The academic Richard Baldwin points out how Trump’s manoeuvrings over tariffs on imports from China have managed to hand a competitive advantage to Canada and Mexico over the US.

• Time magazine has a nice history lesson from the 19th century about how using tariffs to try to pull Canada away from British influence and towards being part of the US didn’t work then either.

• The FT’s Rob Armstrong writes that global stock markets have seemed to shrug off Trump’s tariff threats in his Unhedged newsletter.

Trade Secrets is edited by Harvey Nriapia