A Donald Trump win could trigger a global trade war – with no winners

The European Union is not a happy place. Overall growth is slothful and Germany, the continent’s economic anchor, is expected to end 2024 with its second contraction in a row. The crucial European auto industry is in crisis mode and a trade war, centred on the car tariffs, is under way with China. Bond yields in EU countries that use the euro are rising, an indication of investor skittishness.

The biggest economic threat may be yet to come: Donald Trump-imposed tariffs that would add a second front, the United States, to the EU’s trade battles.

If the Republican is elected on Nov. 5, more tariffs are assured. How high and broad are the only questions.

The former president has proven himself more bark than bite on some issues – he never built the “wall” on the Mexican border, for instance. But the EU would be reckless to assume he would forget the whole tariff issue if he beats Democratic contender Kamala Harris. In his first term, his inner circle was made up of powerful personalities who fought off some of his baser instincts; in a second term, he would surely stuff the White House and the Treasury, Commerce, Revenue and Trade departments with yes-men and yes-women.

He seems obsessed with the United States’ trade deficit with Europe, and his spite for German car exports is particularly intense. “I want German car companies to become American car companies,” he told a rally in Georgia in September, implying that only foreign companies that produced autos in American factories would receive merciful treatment. A few weeks later, Mr. Trump told supporters in Pennsylvania that he would pass what he called the “Trump reciprocal trade act” and make the EU “pay a big price” for supposedly not buying enough American-made goods.

Protectionism was one of his main economic themes while in the White House. This campaign, he has threatened a ramped-up tariff regime that would include 20-per-cent tariffs on all imports and up to 60 per cent on Chinese imports. He has mentioned tariffs as high as 200 per cent on some foreign vehicles, though that absurd level would apply, it appears, only to those daring to cross the border from Mexico. (President Joe Biden earlier this year slapped 100-per-cent tariffs on imports of Chinese electric cars.)

This apparent retreat into 18th-century-style mercantilism – the nationalist zero-sum economic policy that sought to maximize exports by punishing imports – could damage the American economy big time, as well as the economies of Europe and the rest of the world. The risk for all countries is that Mr. Trump might not realize his mistake until severe damage is done.

The first round of Trump tariffs – read: taxes – did no favours for the U.S. economy, according to the Tax Foundation, an independent think tank in Washington. In a recent report, it said that the Trump administration imposed nearly US$80-billion of new tariffs on products valued at US$380-billion in 2018 and 2019, and that the Biden administration added another US$3.6-billion of tariffs on Chinese goods to the Trump tally. The Trump-Biden tariffs will reduce long-term growth by 0.2 per cent, and employment by 142,000 jobs, by its estimate. If Mr. Trump were to make good on his new tariff threats, long-term GDP would fall by 0.8 per cent and cost 684,000 jobs, the foundation said, adding, crucially, that the “estimates do not capture the effects of retaliation, nor the additional harms that would stem from starting a global trade war.”

The EU is terrified that a Trump win would imperil its economy, particularly the auto sector. While Germany is billed as a broad-based economy, the reality is that cars are the show. Fully one-quarter of domestic industrial sales are generated by the automotive industry, which is responsible for more than a third of industrial research and development and almost 800,000 jobs. Almost four of every five cars made there are exported; China and the United States are the main foreign markets. If Germany’s auto sector were to be crippled by American tariffs, its economy would suffer greatly. There is no doubt that the country’s mild economic downturn would deepen, potentially turning into a rout.

The EU reportedly has a task force in place to deal with Mr. Trump’s protectionism, should he win the election. The union retaliated only meekly when, as president, Mr. Trump placed tariffs on its aluminum and steel exports. But the EU’s Mr. Nice Guy era may be over. It seems set to hit American exports with tariffs as equally punishing as any set by the new U.S. administration.

The gamble would be that the threat of mutually assured destruction would force Mr. Trump to back down. That’s a big risk, since he instead could react by doubling down on U.S. tariffs, at which point a global trade war could easily erupt. The EU is already involved in one trade war, with China: This week, it placed tariffs of up to 45 per cent on Chinese-built electric cars. Retaliation is bound to be brutal.

For decades, the United States worked hard to dismantle trade barriers around the world, and the free-trade era generally boosted living standards. Under a second Trump administration, that era could come to an abrupt end. Mr. Trump’s America First global agenda is unlikely to create any winners, anywhere.