EUROPE MUST WIN THE TRADE WAR WITH FREEDOM

President Donald J. Trump announced this past weekend a 30% tariff on all EU exports to the US. As expected, the EU responded by warning that it will retaliate unless a mutually beneficial trade agreement is reached. However, it seems that the optimal scenario for the EU may not be to escalate tensions, but instead to extract a deal similar to the post-Brexit arrangements the UK has sought with the US: that is, sector-specific trade liberalization within a broader framework of managed tariffs.

But what if there were a way for Europe not just to secure a fair trade agreement, but to actually win this trade war? In my view, there is one viable path forward: in an era of rising protectionism and macroeconomic unorthodoxy, the EU should double down on free trade.

The strategy is relatively straightforward and consists of three steps: First, the EU must negotiate a better deal with the US. This will likely involve offering concessions on certain non-tariff barriers, especially in sectors like automotive manufacturing, where Trump’s critiques of EU policy have a lot of merit. Though the EU may be in a less favorable position than before this new round of tariffs, it would still be better off than under the current 30% blanket tariff regime.

Second, the EU should embark on a unilateral elimination of all tariffs, import quotas, and most duties across the board, not through piecemeal free trade areas that remove say 98% of tariffs, but through a truly comprehensive liberalization program. Reasonable exceptions would apply for public health and national security (e.g., duties on certain food imports or textiles from strategic adversaries). In the long term, the EU would regain its spot as an equal alongside the US, as seen from the example of the UK Corn Laws repeal of 1846; there, the UK decided to embrace free trade policies despite an overall protectionist global order, and as such saw itself become an economic powerhouse.

To finance the massive short-term losses in certain sectors, the EU would need to implement a five-year comprehensive subsidization program. Having identified the three industries that would be hurt the most (agriculture, steel, textiles), this program would cost an estimated EUR 146 billion/year, assuming 2023 output numbers, which is still only a fraction of the massive EUR 800 billion NextGenerationEU program. The subsidies should be around 20 cents on every euro of output in agriculture, while 10 cents on every euro of output in steel and textiles; the financing can happen through a simple issuance of Eurobonds akin to the NextGenerationEU Covid recovery scheme. This strategy would also further help European integration as it would buttress the importance of establishing a single capital markets union.

As such, Europe could become the global leader as eventually most trade would be diverted out of the US and into Europe, since the old continent would be seen as a pillar of freedom and stability.