Confrontation or compromise?

EU divided on best response to US trade pressure

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Threesomes can be hard to manage. Source: AFP

For a moment, it almost looked like the Trump administration was making genuine diplomatic overtures to Europe.

“If Europe believes in free trade, we’re ready to sign a free trade agreement,” said US Treasury Secretary Steven Mnuchin at this weekend’s meeting of G20 finance ministers in Buenos Aires. But he may have just been taking the chance to widen the divisions in European positions on trade.

Germany, desperately worried by possible automotive tariffs, is prepared to consider talks with the US, but France is sticking to a hard line, refusing to negotiate before Washington lifts the steel and aluminum tariffs imposed on June 1.

The Buenos Aires summit proved to be uncomfortable for Mr. Mnuchin, as one finance minister after another identified possible trade wars – on the agenda thanks to Donald Trump – as the greatest risk facing the world economy.

The clearest voice against US protectionism was that of French finance minister Bruno le Maire: “The trade war has begun,” he said, before demanding that the United States return to its senses. His German colleague Olaf Scholz took a more diplomatic tone. Both in plenary sessions and one-to-one meetings with Mr. Mnuchin, Mr. Scholz made a reasoned case for free trade as a mutually-beneficial arrangement.

Desperately seeking common ground

Differences between France and Germany are not simply a matter of tone. The two governments disagree how best to respond to US trade provocation. But they need to quickly find common ground. On Wednesday, European Commission President Jean-Claude Juncker flies to Washington for talks. Franco-German discussion is ongoing at every diplomatic level, including between President Macron and Chancellor Merkel.

Mr. Mnuchin’s offer of trade talks echoed that made by Mr. Trump at the G7 summit in Canada some weeks ago. The US government is suggesting a radical approach, abolishing most tariffs between the two trading blocs, beginning with automotive tariffs. In effect, this might resemble a version of the TTIP trade deal – the Transatlantic Trade and Investment Partnership – abandoned by Mr. Trump when he took office early last year.

The German economic think tank Ifo urged the European Union to take up the US on its offer. Instead of escalation and trade war, a trans-Atlantic trade agreement could lift the economies in the US and EU by around 2 percent.

Ms. Merkel has taken a more conciliatory line with the United States, looking to keep talking and find common ground. Germany, with its enormous trade surplus with the United States, has a lot to lose. For the French, negotiations are impossible until Washington scraps inflammatory sanctions on steel and aluminum. “We refuse to negotiate with a gun to our head,” Mr. Le Maire repeated this weekend.

At the G7, that was also Mr. Scholz’s position. But Berlin now seems to be taking a slightly softer line. However, both Berlin and Paris know the EU cannot afford disunity in the face of US pressure. “All of us in the EU agree that we must act together,” Mr. Scholz said.

Getting real

All 28 EU member states agree that preparations must be made for the next steps in the escalating trade dispute. There  is a distinct possibility that the Trump administration may soon put tariffs on imported cars and car parts.

“The European Commission is getting serious now, preparing appropriate countermeasures to American tariffs,” Elmar Brok, a Christian Democrat member of the European Parliament, told Handelsblatt. He suggested the EU could take advantage of Mr. Trump’s comparative domestic isolation on trade, by carefully “increasing the pain threshold” on his political allies. “Europe will certainly not kowtow,” he added.

This tough talk alarms those hoping for a de-escalation of disputes and a return to the politics of free trade. At the G20 summit, Christine Lagarde, managing director of the International Monetary Fund (IMF), warned of the consequences of continued tensions. Trade war between the United States and China – another dispute simmering to a boil – could cut half a percentage point off global economic growth, she said.

Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. To contact the author: hildebrand@handelsblatt.com

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