EU-US relations in the age of Trump II: can Europe develop an effective strategy? Part I

The time for jokes is over. We have seen enough of the Trump II administration during the past three weeks to know that the US President is not bluffing. Hopes in Europe (and the rest of the world) that his plans for sweeping tariffs, or for a return to power politics at home and abroad or to drastically cut US foreign aid, were merely campaign rhetoric and red meat for his base have been dashed. We are now living in the age not only of ‘yes, he can’ but of ‘yes, he will’. Taboos can be broken, agreements ripped up and past friendships or cooperation count for little. We are witnessing the end of decency in politics- always in short supply but still surviving in places before now. Three years ago, when Russia invaded Ukraine and unleashed a major European war, many Europeans believed it would never happen. Putin was merely bluffing in building up his forces along Ukraine’s border to exact concessions from Zelensky and the Ukrainian government. Russia would not dare violate international law in such a brutal way, risk sanctions and isolation and overturn the European security system. Everything would come right again and life would resume its normal pattern. But Putin did embrace the nightmare option and hope proved not to be a very successful strategy.

Now Trump is following the same playbook, dazzling us with the daily sweep of Executive Orders from the Oval Office: closing the US Agency for International Development and halting its humanitarian programmes, shutting federal employees out of their offices, firing senior intelligence analysts in the CIA and 5000 FBI officers, removing transgender people from the military, reopening Guantanamo Bay to receive deported migrants, revoking the right of citizenship for the children of migrants born in the US, pulling the US out of the UN Human Rights Council and UNRWA, ramping up sanctions on Iran, clamping swingeing tariffs on America’s three biggest trading partners (although temporarily paused for Canada and Mexico and now, Trump wants to expand his territorial ambitions by taking over Gaza (in addition to Canada, Greenland and the Panama Canal) and expelling the 2.3mn impoverished Palestinians who live there. The list seems endless and we start every new day with the question: ‘what will he do next?’ Can anything of the rules based international order survive this unrelenting onslaught? Getting ready for the worst is no longer an academic tabletop exercise in an age when extreme actions become the norm and nothing can be taken for granted. Rethinking what we once thought we knew and how we adapt our own beliefs and practices is now the urgent task of both governments and societies.

The same or similar tariffs have not yet been imposed on the EU, but Trump has left Brussels in little doubt that they are coming. Although he has not talked much about Europe thus far, when he does bring up the EU he never has a good word to say about a European integration project which, since the late 1950s, has brought 27 European states together in an unprecedented political and economic community, one which has given them both security and prosperity. Indeed, the US President has used the word “atrocity” to describe the US trade deficit with the EU. It is far from clear what concessions Trump is seeking. The EU doesn’t send illegal migrants or fentanyl to the US and will not help US security if it transfers thousands of troops from its eastern flank defending NATO to its western seaboard; except perhaps to Greenland if Trump is serious about more military presence in the Arctic. So, EU leaders are scrambling to come up with a strategy to persuade Trump, or if that proves unlikely, deter him from starting a trade war with the EU. They would be naive to think that because Trump backed off so quickly from imposing tariffs on Canada and Mexico in return for modest concessions (both countries are essentially accelerating border control enhancements that they were already doing under the Biden administration), he will do the same when it comes to Brussels. Even if tariffs were not imposed immediately, the threat of tariffs will maintain a climate of uncertainty in European business circles, postponing investment decisions and persuading many companies to conclude that the only safe option is to move production and operations to America. This is exactly what Trump was encouraging them to do in his recent speech to the World Economic Forum in Davos. Indeed, it is an irony of sanctions that they produce more leverage when they are threatened to obtain concessions than when they are actually imposed, can be dealt with and elicit countermeasures. Moreover, Trump will be in power for four years and is likely to continue his disruption activities and quest for permanent systemic change in US relations with the rest of the world to his last day in office. That is the best way to keep attention focused on his own person and maintain the US in the driving seat of global politics. It’s all about maintaining a perpetual climate of threat and uncertainty with just enough occasional implementation to make the threats credible. Being an agent of chaos is the best way of maximising your own self-importance. Therefore, no single concession from Europe will stop Trump’s attacks, and he will undoubtedly keep coming back for more, as he is doing already regarding European defence spending, now demanding 5% of GDP instead of 2%. Europe may not yet be prepared, but at least it now knows what it has to prepare for.

Trump’s agenda is easy to discern, even if his policies to reach his objectives seem contradictory or frankly incoherent. He wants to revive the American economy – which Biden left in much better shape than Trump will ever acknowledge – by creating millions of new jobs in manufacturing. The question here is whether this will be sustainable when robots are making production less labour intensive and more highly skilled, and using more green than carbon intensive energy. But Trump’s strategy is to bin as many regulations as possible in the belief that this alone will spur business investment. His approach is openly mercantilist, seeking to pull business and production to the US by replacing incentives (like the subsidies in Biden’s Inflation Reduction Act) with penalties (as with tariffs and taxes). He sees economic activity as a zero-sum game where only the interests of the US, perceived narrowly as immediate benefits, matter. As if exporters do not need importers and vice versa. What happens to America’s trading partners who could be driven into recession and buy fewer US products and services is not on his radar screen. It will be a return to the 1930s Smoot-Hawley tariff and ‘beggar thy neighbour’ economic policies. Trump seems to believe that a stronger and more autarkic, self-sufficient US continental economy can be a substitute for increased foreign trade. Tariffs can generate the revenue to pay for tax reductions so that the US government operations will increasingly be financed by tariff-paying foreigners rather than American taxpayers. The shortfall will be financed by Trump increasing the US national debt by US$7tn over his two terms, the highest of any US presidency At the same time, the combination of deregulation, tax breaks and tariffs will give the US a significant competitive advantage over its trading partners. The US is also abandoning the work in the OECD to harmonise international tax rates for multinational companies to create a level playing field. Tariffs, rather than fiscal policy or structural or regulatory reforms, are the way to fix the ailments of the US economy. We will see to what extent all this proves to be the case.

Next, the President is focused on walling the US off from the rest of the world. The first line of defence is fortified borders along the US frontiers with Canada and Mexico. Admittedly, a difficult and expensive task as the borders extend for 5000 miles in the north and in the south. The tariff threat is the means to gain this border control as well as to empty the US of criminals and illegal migrants by using that threat to induce Latin American countries to accept US deportation flights or open their prisons – as El Salvador has recently agreed to do. The US’ ability to intervene overseas will be constrained if the Pentagon has to station permanently thousands of troops as border guards, with large numbers of Mexican and Canadian soldiers staring at them from the other side of the border as well. These measures will probably keep out most of the illegal migrants but organised crime is famous for its ingenuity and will undoubtedly find new ways to smuggle drugs and all kinds of illegal and counterfeit goods into the US. The second line of defence is control of the American hemisphere both economically and strategically. So, although given the rhetoric on the campaign trail and talk of 60% tariffs against Beijing, we were expecting China to be the first target, it is perhaps no surprise that the incoming US Secretary of State, Marco Rubio, is making his first trip abroad to Latin America rather than to traditional allies in Europe and Asia. He has pressed Panama to withdraw from the Chinese One Belt, One Road programme and to terminate the contract of the Hong Kong based company, CK Hutchinson, to manage the ports at both ends of the Panama Canal (as well as to grant US warships free transit). The focus on securing the hemisphere has also been evident in Trump’s pressure on Columbia, Canada, Mexico and Greenland. It is hardly surprising given that the new administration’s priorities have been on stopping illegal migration and curbing drugs and organised crime. But more broadly, it is also about guaranteeing US freedom of action across the hemisphere and keeping out foreign powers like China. Chinese investment in Mexico which could be a back door into the US concerns Trump in particular. Then finally, we have the rest of the world where Trump sees less a division between allies and adversaries than between those that he can do deals with to gain advantage and those that resist his entreaties or have nothing of value to offer. The problem for Europe will be to get attention in this whirlwind of Trumpism, with the agenda changing constantly from one day to the next, before other countries have had a chance to digest the consequences and plot their responses. Yet, in this climate being ignored by Trump may have its advantages as well.

So how can Europe prepare for the next four years?

Stay cool, be confident, don’t be needy or obsequious and stay united are the rallying cries that we hear around Brussels at the present time. The EU is not defenceless, particularly in the area of trade where it is an important global player with strengths and assets. Trump appreciates strength and likes to negotiate. So, engage with him early and establish links with all the key people in his administration in order to seek out the pragmatists and work every angle, is what the EU is telling its representatives in Washington to do, and member states are conveying similar signals. Yet, Europe knows it has to engage in an organised way and with a clear agenda of incentives and potential retaliatory measures to shape Trump’s approach to the EU, and convince him that at the end of day the US, as much as Europe, has an interest in a stable, balanced and predictable trade relationship. Yet, the challenge for the EU will be to be more transactional and provisional than it is used to in order to do deals with Trump while upholding its principles of open trade and respect for the WTO rules. In which areas can the EU compromise, and where should it make a stand? At the same time, preserving EU unity will not be easy, particularly vis-à-vis a President who likes to divide and rule. The EU has its own ‘awkward squad’ of governments that share Trump’s anti-liberal and nationalist values, and who see in him a useful ally to weaken the EU and turn it into a looser network of nation states. Prime Minister Viktor Orbán of Hungary has wasted no time crowing that Trump’s re-election proves that far-right populism on both sides of the Atlantic is the wave of the future. He evokes a second, better planned and organised “invasion of Brussels”. Robert Fico in Slovakia has expressed similar sentiments. Prime Minister Giorgia Meloni of Italy is also close to Trump and was the only EU leader to attend his inauguration. Yet, she is a supporter of aid to Ukraine, pro-NATO and has developed a pragmatic working relationship with von der Leyen and the EU. But this awkward squad has tried to block or at least slow down more EU common financing for aid to Ukraine, the diversification of EU gas supplies away from Russia and the various EU sanctions packages against Moscow. Even where they have not succeeded in blocking altogether, they have undermined EU unity, obtained important concessions and made the EU institutions and leadership spend months of valuable time in grinding down their opposition. In foreign policy, the EU has no system of qualified majority voting although in trade policy, the Commission is empowered to act on behalf of the Union. No doubt the far-right populists within EU governments (or oppositions gaining traction in the opinion polls) will use the same tactics when it comes to EU retaliation against Washington for exorbitant trade tariffs or the unilateral abrogation of existing trade agreements (as on steel, aluminium and airplane subsidies). To divide the EU, Trump may well make attractive offers to individual member states or announce tariffs on those he doesn’t like in order to test the degree of EU solidarity. He has already used this tactic with Denmark to gain concessions over Greenland. EU member states will then have to decide if they have more to gain by sticking together or by making the trip to Washington alone in the hope of carving optouts for themselves. This is what the Dutch appear to be doing with the Dutch Trade Minister, Reinette Klever, announcing a mission to Washington in March. But division will have costs for the EU in the longer term, and these need to be quantified and acknowledged. For those countries that are outside the EU but important trading partners of the US, like the United Kingdom and Norway, these go-solo trips across the Atlantic will seem natural. Yet, these countries are also partners of the EU with specific trading agreements with Brussels. So they will be under pressure to align themselves with EU positions, particularly if they are also subjected to a universal tariff from the US. Already, UK Prime Minister, Keir Starmer, is performing a delicate balancing act between his desire for a “reset” with the EU and an improved trading relationship on veterinary rules and agricultural exports as the UK and the EU review the Trade and Cooperation Agreement next year, and his desire to preserve the “special relationship” with the US. But if EU unity will be difficult or sporadic, the question is whether the EU should make it always the objective and then be judged to have failed when individual member states break ranks. So, some EU observers are proposing a “flexible geometry”, whereby member states willing to take action together form coalitions of the willing outside the formal EU institutions. These are often referred to as “unconventional forms of cooperation”. Commission lawyers are currently looking quietly at how existing EU law could provide flexibility for the institutions to take action as well. There is a sense of urgency that the Trump challenge to the rules-based order and its potential consequences for the future of the EU is simply too serious to allow business as usual and the slow pace of EU decision-making. An offensive as well as defensive response strategy will be needed. What could go into it?

Counter-tariffs, of course. Beijing has already imposed a 15% tariff on imports of US coal and liquified natural gas (LNG), as well as US commercial vehicles like pickup trucks and farm machinery. Four rare earths will be blacklisted as well. These are in response to Trump’s across the board tariff of an extra 10% on Chinese goods entering the US. Beijing has also announced an investigation into Google, targeting the tech giants of Silicon Valley who are now supporting (and in some cases bankrolling) Trump. The Chinese response is an interesting one. It came immediately, suggesting that it had been carefully prepared in advance and therefore could be implemented in a matter of days. It was highly targeted to send a clear message but not start a trade war. Trump was also being cautious by backing off from his campaign threat to impose a 60% tariff on Beijing. The Chinese were clearly signalling that they were ready to negotiate on trade, but could follow this first batch of tariffs with far more impactful ones if the negotiations fail. One of the reasons why China is in a stronger position on trade than during Trump’s first term is because Beijing has diversified its economy and made itself far less dependent on the American market by forming new trading relationships with Latin America, the Middle East and Asia, particularly India. On the other hand, the Chinese economy is flat, so Beijing will want to avoid a trade war and negotiate if it can obtain a reasonable outcome. Blocking fentanyl precursors from being exported would send the right signal.

The EU can learn from the Chinese approach. Diversifying trading partners takes time, but here the EU is in a stronger position than Canada or Mexico which send 75% of their exports to their American neighbour. This is the moment for France to put its opposition to the EU-Mercosur trade agreement on hold and allow its ratification to go forward, particularly before Trump tries to bully the Latin American countries to reorient their trade towards the US economy, as during the days of the United Fruit Company or Franklin Roosevelt’s Good Neighbour policy in the 1930s. Not to forget Theodore Roosevelt’s ‘Roosevelt Corollary’ of 1911, which gave the US the right to intervene militarily in Latin America to drive out foreign influences. This is the moment for the EU to step up its efforts to conclude a trade agreement with India and focus on the rapidly developing economies of Indonesia, Malaysia and Vietnam. As the EU has been striving to ‘derisk’ from China when it comes to supply chains and raw materials, it can hardly ignore potential new markets elsewhere. When it comes to countermeasures, the EU should look at smart sanctions that target the people around Trump who have his ear, especially when they are feeling the economic pain. Tesla cars, produced by Elon Musk, are an obvious choice as are the platforms of the social media and tech companies, particularly when it comes to taxing their products and services. Last time round, the EU went for Bourbon whiskey and Harley Davidson motorcycles- emblems of American popular culture but not sold in sufficient quantities in Europe to produce much of an impact. Given the number of tycoons around Trump, finding enough targets to send a message should not be too difficult, but there will obviously be areas where the EU will not want to inflict damage on itself as well, for instance in banning the SpaceX Falcon 9 rocket which the European Space Agency uses to launch its satellites. The problem with trade sanctions is that supply chains for products and services are today so complex and integrated that it is virtually impossible to hurt someone else without hurting yourself at the same time. To avoid a simple tit-for-tat approach, the EU needs to identify the best-targeted sanctions now and begin the process of obtaining the green light of the EU member countries on sequencing the individual actions.

The second step is to have all the EU anti-coercion instruments ready. As we have seen in the cases of Colombia, Mexico and Denmark, Trump is using tariffs primarily as a coercion instrument to extract non-trade concessions, such as on borders or migration. But there can be other, non-economic types of pressure as well. Elon Musk has been using his X social media platform to interfere in the German elections and to boost the prospects of the far-right AfD party. He tried to intimidate the UK government into launching a national inquiry into child sexual abuse as well by insulting a number of government figures. The EU needs to understand who will be trying to undermine it and with which means. Its defence mechanisms need to be finetuned for these specific areas. For instance, the Digital Services Act and Digital Markets Act and the General Directive on Privacy Regulation (GDPR) need to be used once Trump and Musk start to challenge EU data regulations or object to the fines that the Commission has already imposed on Google for abuses of its monopoly position, or on X or Facebook for failing to factcheck disinformation or take down harmful and extremist content. Here, the EU will need to be courageous and stick to its rules in the face of the certain onslaught from the US tech giants. But the European market of 500mn consumers is an important one for these companies as well. Google does a good deal of its global business in Europe and is now under pressure in China. The EU’s anti-coercion instrument can also be used to take trade disputes and unfair practices to the WTO as the EU has done in the case of Chinese trade restrictions on Lithuania (in retaliation for Taiwan opening an office in Vilnius). So, the EU must not talk itself down. An impression of a frightened Europe, gloomy about its future and lacking in self-confidence, will only encourage the EU’s detractors to press harder.

Counteroffers can be part of the response package as well. Trump often complains that the US buys a massive amount from Europe whereas the EU buys almost nothing from the US. Of course, this is the usual gross exaggeration, but the EU can make proposals to level the playing field. The President of the European Central Bank, Christine Lagarde, has suggested that the EU purchase more American LNG (as it moves to sanction LNG in its residual trade with Russia) and more US weapons (although according to the recent Draghi report on EU Competitiveness, around 60% of European defence procurement is in the US already). There could be more latitude for the US to export its cars and trucks to Europe by adjusting EU standards or giving certain US goods exemptions from the EU’s carbon adjustment border taxes. The current moves against climate action in the name of greater EU competitiveness, and the relaxation of existing rules and ambitions for the Green Deal (certainly regrettable) nonetheless give the EU institutions a little more political wiggle room to show the US more flexibility. Free trade agreements might also be back on the agenda but Trump will undoubtedly see these as ways of rectifying existing trade imbalances rather than growing more trade over time and he will certainly demand more market access for US pharmaceuticals and agricultural products. There is always big opposition to comprehensive trade deals on both sides of the Atlantic and, as Trump was on the point of dumping the USMCA (formerly NAFTA) with Canada and Mexico, no guarantee that the US will respect them. Moreover, accusations that the US is sending “Frankenstein genetically modified foodstuffs” or chlorinated chickens to Europe or taking over European health systems with its overpriced drugs and health services will soon resurface. Yet, what the EU can do (and is good at doing) is to propose to Trump to open a strategic dialogue on some of the big regulatory issues. For instance, in the tech area on data and intellectual property protection or on tech rights or regulatory harmonisation. Trump may not like regulation, but Americans want their children to be protected online too, they do not want their data to be captured and exploited by foreign powers to build their own AI systems and they do not want Russians interfering in their elections. So, a common agenda for talks could be achieved. The Biden-era Transatlantic Trade and Technology Council is now probably dead; but the G7 (which has done a lot of work on AI) or the US-EU specific councils on energy and cybersecurity are still there and could be used. The trick with Trump is to seize the initiative and try to get ahead of the game. For instance, after the President stated that the US needed to acquire Greenland for its national security, Denmark sent ships and drones to reinforce Greenland’s sea defences and NATO said that it would increase its presence in and monitoring of the Arctic region. These steps undermine Trump’s argument that only his extreme measures (invading a NATO ally to seize its territory) can fix the problem.

Competitiveness is however the prerequisite of enabling the EU to resist the challenge of a more transactional and less rules based international economy in the future. The Draghi report has already pinpointed the structural reasons for the EU’s declining competitiveness vis-à-vis the US and the rest of the world, and proposed reforms to tackle the problem. This is probably the time for a new EU push towards closer integration as with the single market or the euro or the common foreign and security policy back in the days of Jacques Delors. Yet, this is unlikely given the lack of appetite for new EU treaties which would be tough to negotiate and probably would not (in the present mood) survive a series of national referendums. But Ursula von der Leyen has made security and defence and competitiveness the two leitmotifs of her second Commission term, and she is right to do so. Sensible deregulation has to be part of this agenda without going to the extreme of a kneejerk bonfire of all rules as we are currently witnessing with social media and AI development or environmental regulations in the US. But structural reforms will be needed too, such as a banking union, a capital markets union and an EU common investment fund. The EU single market still needs to be completed for services. Usefully in this connection, last week the Commission published its Competitiveness Compass setting out its agenda. A key component is industrial policy as the EU looks to protect and develop key industrial sectors and its science and technology base. It will need to develop a venture capital market to leverage investment beyond state aid and startup funding, particularly in the innovation and SME sectors. A policy on energy and supply chain diversification will enhance Europe’s strategic autonomy. The Commission will have to lead when it comes to identifying the difficult trade-offs between environmental protection and CO2 emissions targets and the continuing use of fossil fuels in the automotive, transport, chemical and building sectors. There will be some difficult trade-offs between enhancing short-term competitiveness and sticking to WTO rules (for instance, on carbon border taxes or emissions permits). The EU will need too to pursue mini-lateralism to conclude climate change cooperation agreements to keep the Paris Agreement alive in the wake of Trump’s second withdrawal from the pact.

But not everything can be done by the EU institutions. A continuation of the political and economic reform paralysis in Paris and Berlin after the German elections on 23 February – with weak governments pushed by the far-right on migration and by the far-left on excessive welfare spending – could doom these efforts for the duration of the Trump II Presidency.

Finally, China. It will be the critical variable in the EU efforts to withstand Trump’s economic America First nationalism. So far, Trump has been ambivalent on China and has not given it the priority that everyone expected, and particularly with so many China hawks like Secretary of State, Marco Rubio, and National Security Adviser, Mike Waltz, in key positions. Trump has said that he is in no hurry to talk to President Xi, who seems to want the call more urgently. Given that China is the US’ second largest trading partner after Mexico, a trade deal with Beijing can bring enormous benefits to the US, and to Trump’s popularity at home, and Trump knows it. During his first term, he placed sanctions on US soya bean exports to China. Beijing went to Latin America instead and US farmers suffered. They had to be paid expensive subsidies from the US federal budget- hardly an economic win if export restrictions undermine the earnings from tariffs. Elon Musk is also enormously invested in China with joint production of his Tesla cars, and he and fellow tech entrepreneurs will not fancy a US-China trade war. It was notable that this week, the US Post Office stopped small parcel deliveries from China (not subject to taxes under US$800), but then within a day resumed them. The US retail sector for cheap goods is highly dependent on ‘Made in China’. So, the EU needs to look carefully at what the US and China do together and be part of that dialogue too. Although the US and China would do a bilateral deal, given the enormous size of their economies, it is bound to have a big impact on the trade left for the rest of the world. Equally, the EU will not want to see Chinese goods shut out of the American market being dumped in Europe; nor will it want to have the US pressure Europe to get tough on Beijing geopolitically – for instance, over Ukraine, Taiwan, Iran or China’s role in the Middle East, Africa and Latin America – while Trump is doing trade deals and warming the relationship behind the EU’s back. The EU will have to defend its own interests – if it can identify them precisely- not those of the Trump administration. For instance, EU-China cooperation on climate change or the maintenance of the UN system and its important agencies like the WHO and UNRWA, which the US has now withdrawn from. The reform of the WTO and an extension of its mandate to cover need types of economic activity, particularly the digital economy, could be on the agenda too.

Yet, all this said, economic responses no matter how important will not be sufficient. The EU needs to reduce its dependence on the US in the field of security and defence as well and to elaborate a more impactful foreign policy of its own to have a voice in the major conflicts and peace negotiations affecting its own interests, starting with Ukraine and moving rapidly to the Middle East and Africa. Trump is also perfectly willing to link tariffs or economics and security, as we saw recently when Vice President JD Vance said that the US would take measures against NATO if the EU clapped fines on Elon Musk’s X. The NATO Secretary General, Mark Rutte, attending the special retreat of EU leaders in Brussels this week, expressed his confidence that tariffs could be kept far apart from security and NATO affairs. We wish we could be so confident. So, in the age of Trump II, the EU will need a convincing security and defence strategy as much as a stronger, more resilient economy. How it can achieve this will be the topic of ‘Part Two’ of this article.

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.