Front Bench: Europe's dilemma is that if it pushes Donald Trump on trade, he might just tear up the WTO rule book

No one can say they didn’t see it coming. Still, the decision by Donald Trump to impose large tariffs on steel and aluminium imports (25 per cent and 10 per cent, respectively) from key American allies the EU, Canada and Mexico has caused shock across the West.

Other, smaller partners including Australia, South Korea and Brazil had been pressured into submission and agreed to cut their exports. That won’t be the case with Europe or the US’s fellow North Americans.

No dummies 

Canada has decades of experience in fighting limited trade wars with Washington, in particular over softwood lumber, and Ottawa knows exactly how to calibrate a targeted response. It is placing $13bn of tariffs on products including beer kegs, whisky, toilet paper and "hair lacquers”. Mexico and the EU will follow similar tactics. Brussels is set to impose tariffs on goods including bourbon whiskey and oranges.

Why those goods? The EU says it is because they will cause the least damage to European industries and consumers. It also just so happens that bourbon comes from Kentucky, home of Republican Senate majority leader Mitch McConnell, and most American oranges from Florida, the swingiest of swing states in US elections.

How it might get worse

Two big fears stalk Europe on the issue. The first is EU unity. While the initial response has been unified, not all European countries will be damaged equally by the tariffs and some European nations, notably Poland, are more keen on Trump than others. Germany, in particular, is thought to be set on avoiding escalation, in contrast to the tough attitude being taken by Emmanuel Macron in Paris.

The second is a full-blown trade war. Britain’s trade secretary, Liam Fox, has cautioned the EU against a tit-for-tat escalation. However, the US already has its next set of actions lined up, with Trump last month ordering an investigation into whether car imports posed a national security risk (the same reasoning given for the steel and aluminium tariffs).

That would open the door to tariffs on car imports, something which would likely immediately turn the dovish Berlin hawkish.

WTO at risk

Brussels is also seeking to challenge the tariffs at the World Trade Organisation. Doing so may seem logical, but if the WTO does rule in Europe’s favour there is a risk that Trump will simply choose to ignore it, or worse, tear up the rule book completely. Europe is, in effect, still playing by the old rules of the game. But it’s not at all clear that Trump is even interested in the old order.

For the clearest sign yet of how differently this administration sees global trade, look at the Nafta renegotiations. Those have imploded after months of work, because, according to Canadian PM Justin Trudeau, the US insisted on a five-year sunset clause for the new deal.

Nafta is one of the world biggest trade deals – commerce between the US and its two neighbours sits at $1.1 trillion. Nafta has enabled the growth of a huge cross-border automotive industry. A five-year deal would be highly unlikely to provide the certainty needed for business investment.

What was the original point of all this?

Ostensibly it is about reigning in unfair practices by China, which has created a vast oversupply of steel and depressed global prices. These tariffs already hit the rest of the world in March, but exemptions for American allies have now expired. However, Chinese steel exports to the US are negligible, and the collateral damage looks set to be far greater than the blow to Beijing.

So why is the President sticking to his guns?

In part, it is simply Trump fulfilling a campaign pledge to stand up for the Rust Belt. His trade stance is popular with his supporters. There is also the possibility that, once again, with success in Congress eluding him and domestic pressure building, Trump has lashed out using his executive powers.

The adulation of Trump voters will go some way to drowning out the criticism from congressional Republicans.

Don’t forget, either, that the US economy is one of the few that is relatively self-sustaining – only 8 cents of every dollar spent in the US goes on imports. For now, the pain will be everyone else’s to bear.

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