National governments are holding the EU back from a strong Trump tariff response

President von der Leyen had strong words but no actions following the imposition of 20% tariffs on all EU exports to the US. A huge debate is raging on whether the trade nuclear option should be used.

Preliminary impact estimate for first year of Liberation Day tariffs as calculated by The Conference Board

At 5am yesterday morning, EU Commission President Ursula von der Leyen put out a video statement reacting to the global trade war announced by the President Trump the night before. “Let's be clear-eyed about the immense consequences,” she said. “The global economy will massively suffer. Uncertainty will spiral and trigger the rise of further protectionism. The consequences will be dire for millions of people around the globe.” But despite the extreme crisis she was describing, she announced no new retaliatory action in response to the US announcement.

The lack of immediate response was expected, because even before Trump’s “Liberation Day” announcement there has been a fierce debate raging between member states about whether the EU should actually pull the trigger on the second round of the package of retaliatory tariffs announced last month in response to Trump’s earlier tariffs on steel and aluminium. That package hits €26 billion worth of EU-US trade But a number of EU national governments got cold feet and told the Commission to delay the second phase - for two reasons. One was that they got nervous things would spiral out of control after Trump threatened to retaliate against the retaliation by taxing French wine imports at 200%. The other is that some were concerned the EU would shoot its shot too early, and that the package should be reserved as a threat for now to discourage Trump from going after the EU. So, the €26 billion retaliatory tariff package was delayed. Clearly, the dissuasion hope hasn’t worked so far. But some believe that the EU should still wait at least until mid-April to move forward with it to give space for negotiations. “As Europeans we will always promote and defend our interests and values,” President von der Leyen said. “And we will always stand up for Europe. But there is an alternative path. It is not too late to address concerns through negotiations.”

There is a time limit for that hope, however, which is next Wednesday. While the across-the-board 10% tariff on all imports will take effect tomorrow, the additional tariffs on the 60 ‘naughty countries’ will take effect on 9 April. If they are actually applied on that day (and the previous experience of Canada and Mexico gives Europe every reason to think they won’t be), then the EU will have no choice but to respond - at least with the already-proposed retaliatory tariffs on €26 billion worth of US goods. But the tariffs Trump announced on Wednesday will hit €380 billion worth of EU goods. So clearly, the retaliation on the table already is bringing a knife to a gun fight.

Some economists and politicians are warning that on the whole, a massive retaliation package could do more harm than good to the EU, and that Brussels should instead stand back and watch Washington shoot itself in the foot. The graph above shows that US GDP will be far more negatively impacted by Trump’s tariffs than any other country. While the US would see GDP drop by 1.2% in the first year, the EU would only see a 0.2% drop. The UK would see a 0.1% drop (as Lewis Goodall has pointed out, it’s therefor absurd for anyone claiming that the UK getting just 10% tariffs is a massive Brexit benefit).

So there is a tempting argument to say that the EU should stand down, because as the chart notes, this does not include retaliatory tariffs. And if those are added in, the pain could end up being a lot more evenly distributed than it is now. But it seems to me, as I’ll outline below, that this is yet more dangerously naive thinking in Europe that this storm will pass over them if they just keep their heads down.