Explainer: How might the EU respond to Trump's potential trade war?

THE US PRESIDENT has once again threatened to impose sweeping 25% tariffs on EU member states, with claims that Europe is ‘ripping off’ Americans and set up its trading bloc to take advantage of consumers.

The tariffs, floated by Donald Trump, would be detrimental to the Irish and overall European economy.

Earlier this month, US paused tariffs on Canada for one month after Prime Minister Justin Trudeau pledged stronger border measures to stop crossings of migrants and illicit drugs.

A similar pause was introduced for Mexico, after President Claudia Sheinbaum agreed to send 10,000 troops to the US-Mexico border.

Since then, Trump has continuously threatened the EU with the taxes – but has yet to act on his word. This has given European lawmakers time to draft, plan and propose their response.

So, how likely is it that tariffs will be imposed? And what might the EU’s response look like?

First, what is a tariff?

A tariff is a tax on goods and services imported from other countries.

Trump is proposing a blanket 25% tariff on imports coming from EU member states. This will mean, for every €10 worth of goods entering the US, the tariff will add an extra €2.50 in tax onto the price.

Companies will often increase prices relative to the tariff rate – offloading the cost of the tax onto the consumer. This is because there are often very high costs associated with exporting goods and an additional tax threatens a company’s profit margin.

Tariffs, because of this, are used as a tool by governments that seek to change consumer purchasing habits – hoping that, by making imported products from abroad more expensive, citizens will buy local. 

Remains unclear why Trump wants tariffs

It is unclear just how long the tariffs will be in place. Earlier plans to tax imports into the US from Canada and Mexico this month were almost immediately overturned once leaders came to political agreements (which had – largely – already been in place).

Niall Moran, a trade lawyer and an economist at the Brexit Institute in Dublin City University and economist at the Institute of International & European Affairs Dan O’Brien both said this month that it remains unclear clear why Trump has decided to target the EU with tariffs.

Trump believes the EU is ripping off the US, but such claims are largely baseless and do not reflect the reality of the trade deficit between the two entities. Those claims have also been completed rejected by the European Commission today.

A statement from the European Commission’s trade spokesman said the creation of the EU has reduced costs for American exporters and has harmonised trade agreements between the US and 27 European countries. 

“As a result, U.S. investments in Europe are highly profitable. American companies have been able to invest and generate substantial revenues, precisely because the EU is a large, unified market that is good for business,” he added.

It is also unclear how best the EU could overturn any potential decision. It is likely, for that reason, that European leaders are instead focusing on preventative measures (think: Oval Office meetings, diplomacy and intense lobbying).

The lag in imposing the tariffs has allowed the EU to get ahead of the potential announcement and put in place plans for a quick response, both locally and continent wide.

In Dublin, for example, Tánaiste Simon Harris yesterday chaired the first meeting of a trade body set up in response to fears that Trump could slap tariffs on Irish exports. The Consultative Group on International Trade was established two weeks ago.

At a meeting in Government Buildings, Harris emphasised the importance of being prepared in the event of any future US tariffs.

Meanwhile, Taoiseach Micheál Martin has been meeting with EU leaders frequently to discuss the issue – telling reporters earlier this month that member states must “act as one”.

How might the EU respond?

A European Commission spokesperson told The Journal: ”The EU will react firmly and immediately against unjustified barriers to free and fair trade, including when tariffs are used to challenge legal and non-discriminatory policies.”

It is understood that the EU will seek to introduce a targeted range of tariffs, placed on particular sectors in the US, which will aim to place pressure on the Trump administration to roll back the measures, if a political solution is not agreed first.

O’Brien suggested this month that the Commission may go further and only place targeted tariffs Republican-run states in its response.

The reason the EU might opt for targeted measures, rather than Trump’s broad-stroke approach, is due to the potential for major economic disruptions and their consequences on inflation rates, which have been flatlining in the Eurozone recently.

Moran said that it would be best approach for EU member states to “speak with one voice”, to avoid more measures being introduced that target one specific country or industry.