A Trump Trade War 2.0 will be worse than the first for Europe

It’s not that Europe would be defenseless in a new trade war, any more than it was in 2018. Back then, a 25 percent tariff on steel, and a 10 percent one on aluminum, shocked Brussels deeply and prompted retaliatory tariffs, straining the transatlantic relationship.  A personal visit by the Commission President Jean-Claude Juncker to Washington smoothed things over, and stopped a budding trade war spiralling out of control.

Today, the EU is “ready to act” if a new Trump administration does raise new trade barriers, said Bernd Lange, the chair of the European Parliament’s trade committee.

Since 2018, Brussels has developed new measures to protect its domestic market, including the so-called anti-coercion instrument: this was originally aimed at deterring China from bullying EU member countries, but could be repurposed to protect against the U.S., Lange said.

“We’re not interested in escalating but we’re not accepting illegal measures not aligned with the international rulebook,” said the center-left MEP. “We can hit really hard.”

But the distortions of second- and third-round effects (such as EU retaliatory duties on U.S. goods entering Europe, or more import tariffs on EU goods from third countries) could make the job of steering the broader economy much more difficult for the European Central Bank, which is devoting more and more resources to modeling what could, in an extreme scenario, become a disastrous rerun of the protectionist 1930s.

There was a clear hint from ECB President Christine Lagarde of some urgent behind-the-scenes economic diplomacy last month, at the annual meeting of the International Monetary Fund and World Bank in Washington. In a public interview, Lagarde appealed to the next U.S. administration not to go down that route.