What can the EU expect from a second Trump term?

By
Pieter Cleppe
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European policymakers seem puzzled what to do following Donald Trump’s victory in the U.S. Presidential election, and in particular when it comes to this threat to impose new tariffs on imports from the EU. A great danger here is that the European Union would badly overplay its hand and opt to strike first.

That is possible to do in a rather covert way, because a truce on the EU’s own retaliatory tariffs against previously announced US tariffs elapses in March 2025. One does not need to be a great political genius to understand that “striking first” is not the best way to deal with Donald Trump, even if some, like the UK’s former Ambassador to Washington, Lord Darroch, believe Trump will strike first, and then tell countries: “If you want them lifted what are you going to do to even up, to rebalance the trade relationship?”

The art of the deal

In any case, everyone agrees that with Trump, there is always a deal to be made. Back in 2018, he wrote on Twitter:

“The European Union is coming to Washington tomorrow to negotiate a deal on Trade. (…) I have an idea for them. Both the US and the EU drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade! Hope they do it, we are ready – but they won’t!”

As Swedish classical liberal thinker Johan Norberg’s has put it: “Trump’s tariffs will primarily hurt Americans. Europe should not respond by hurting Europeans with retaliatory tariffs, but by offering alternative deals that might tempt Trump, and deepen free trade with a global coalition of the willing.”  

“We think tariffs will have to wait,” until perhaps a year from now, analysts at Barclays wrote after the election. Also the UK government reportedly believes that Trump is likely to water down his blanket approach to tariffs because it would push up inflation in the US. Instead, UK Ministers believe that he is likely to pursue a sector-by-sector approach instead, with a focus on tariffs on steel, aluminium, technology and cars.

Scott Bessent, the hedge fund manager who is favourite to become Donald Trump’s new Treasury secretary, has stressed that there will be “negotiation leg” to Trump’s plan for tariffs.   

Interestingly, the first sign of Trump signaling some flexibility are in.

According to one report, he is considering to exempt British exports from tariffs. Importantly, the UK government has already signaled it will not resort to retaliatory tariffs against the US in the event of a trade war amid concerns that such a move would only provoke Donald Trump and have little benefit.

If UK PM Keir Starmer would take the deal offered by Trump, it would likely involve things that make it harder for the UK to commit to regulatory alignment with the EU.

No more weaponizing of trade

This would be a positive thing. The EU’s increased tendency to weaponize trade by overloading trade negotiations with regulatory demands for trading partners is deeply troubling for whoever supports free and open trade. In an ideal world, the UK would not need to sacrifice trade with the EU in order to increase its trade with America. Then, that becomes difficult due to the EU’s zeal to link trade with regulation – which is partially already the case in the international managed trade system of the World Trade Organisation, to be fair.

One of the likely subjects that the Trump administration is the EU’s deforestation legislation. First, this damaged trade relations between the EU and South East Asian palm oil exporters, like Malaysia and Indonesia. They found it particularly unfair that despite NGOs like Global Forest Watch praising them in 2023 for achieving a sharp reduction in forest loss, the EU refuses to declare their standards as equivalent. This especially given that already an estimated 93% of palm oil imported into Europe is sustainable and that the UK does accept Malaysia’s anti-deforestation standard as equivalent.

The protest however spread and after also Brazil and the United States demanded a delay, the European Commission decided to give in. Crucial was also pressure from Germany. CDU MEP Peter Liese even called the EU’s new deforestation rules a “bureaucratic monster.”

The underlying problem here is that the EU has been effectively weaponizing trade, something it accuses others of. Instead of aiming for greater opening of markets, the EU is increasingly demanding its trading partners to comply with a whole range of regulations. This is one reason why the trade agreement between the EU and Latin American trade bloc Mercosur still has not been finalised.

In sum, Trump’s tariff plan is very much part of a broad negotiation, whereby he is likely to not only demand the EU to lower its own tariffs, but also to stop tying all of these burdensome regulations to trade. The good thing is that at the highest EU Commission level, some policy makers have in fact already changed their mind. Namely Sabine Weyand, the European Commission’s Director General for Trade, has remarked that trading partners are increasingly questioning EU’s use of trade policy to act as a “global regulator”. She thereby also questioned the EU’s handling of its deforestation directive, stating: we have to recognize that the means are extremely burdensome and very difficult to meet for developing countries and notably for small and medium sized businesses and smallholders in these countries.”

Furthermore, Trump will likely also demand the EU to stop instrumentalising state aid policy to go after U.S. big tech, apart from overregulating it. Also this is ultimately welcome for the EU. The EU is increasingly ignoring violations of state aid, so it is disheartening to see it then double down on the likes of Apple, for having agreed tax rulings of which the EU claims they were not really open to everyone. While one could perhaps make a case for that, surely, we are talking about a grey zone. Clearly, the EU should prioritise fighting obvious violations of the EU Treaty ban on state aid. Will Trump force the EU to refocus on its core business, while preventing it to overregulate? It is not far-fetched at all.

Punitive climate policies under pressure

Another topic likely to be put on the table by Trump is the EU’s new protectionist climate tariff CBAM, or “Carbon Border Adjustment Mechanism”, which introduces a tariff on imports from countries that opt not to follow the EU’s expensive climate policies.

India has already protested the idea at the WTO level. The UK is considering to introduce a similar tariff, in order to avoid trade disruption with the EU, but that is misguided. The UK Growth Commission has warned that if the UK were to do this, it “could lead to GDP per capita losses of between roughly £150 and £300”, or even up to £650, in case supply chains would realign around the lowest cost producers.  

The researchers have also calculated the benefits of the approach of replacing the Paris Accord with a “Climate and Freedom Accord”, estimating these at £1,000 per capita. Also this alternative approach may well appeal to Trump, who is likely to pull the United States once again out of the collectivist “Paris Agreement.” Signatories to such an alternative international treaty would  benefit from trade advantages, provided that they implement climate-friendly free-market policies.

A new study by the Warsaw Enterprise Institute and like-minded think tanks explains that this would “de-bureaucratise the economy”, along with “tax changes (…) to make investing in PP&E (Property, Plant, and Equipment) more profitable in a way that incentivises companies not only to maintain their current capacities but also to modernise and develop new projects. Subsidies of any kind should be abolished in an orderly and gradual manner.”

Other suggested measures signatories to such an international treaty could introduce are tax-exempt “CoVictory bonds” as well as targeted tax cuts (Clean Tax Cuts, CTCs) in the four sectors responsible for 80% of greenhouse gas emissions—transport, energy and electricity, industry, and real estate. Tax cuts aimed at breaking up monopolies are another possible measure.

Such an alternative climate policy approach is unlikely to receive a lot of sympathy at COP29, the upcoming Climate Summit of the UN in Baku, Azerbaijan, but the fact that neither European Commission President Ursula von der Leyen or German outgoing Chancellor Olaf Scholz will be attending this conference speaks volumes about the remaining support for the punitive climate policy model. Despite this, it still is in place in the EU. Perhaps Trump’s election may now change this. EU trade federation BusinessEurope is rightly concerned Trump’s policies that are friendly to fossil fuel exploration will punish the EU’s already struggling industry. One can expect these kinds of concerns to translate on ever greater demand to abandon the EU’s “green deal” and related policies. 

Ukraine

Last but not least, there’s the massive question of how Trump will deal with Ukraine. Trump has vowed to fix the problem in 24 hours”*, and according to speculation, his Vice President-elect, JD Vance, has suggested that Russia’s war in Ukraine could end with freezing the lines of conflict.

It must be stressed that Trump hasn’t approved a specific peace plan, allies said, including how he would persuade Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky to sit at the same table and negotiate.

For now, speculation must be restricted to looking at what his future team thinks about it all. Trump has picked Mike Waltz, a congressman from Florida, to be his National Security Advisor. Here, Europe very much comes into play. Ostap Yarysh, the Defence editor of Voice of America thinks: “Overall, Waltz’s comments on Ukraine often revolve around the idea that Europe (especially Germany and France) is doing too little to support Ukraine and that the U.S. must demand more from these countries.”

Waltz himself has called for increased sanctions on Russia’s energy sector combined with providing provide Ukraine with long-range missile systems that could reach Russian territory, saying:

“The burden cannot continue to be solely on the shoulders of the American people, especially while Western Europe gets a pass. There must be policy space between Biden’s current strategy of “as long as it takes” and those demanding “not another dollar.”

Furthermore, three people who are currently helping to set up Trump’s new administration, explained a plan to stop the war to the Wall Street Journal. It would involve Ukraine accepting that the territories are lost, and Russia accepting a corridor with peace keepers paid for by Europe.

Ukraine would also refrain from joining NATO for at least the next 20 years. At the same time, the United States would continue to supply weapons to Kyiv in order to deter Russia from renewing its war of aggression.

Ukraine won’t have much of a choice to go along, but will this strategy convince Russian President Putin to end the war? Only time will tell.  

Meanwhile, back in Brussels, the usual suspects are already hard at work not letting a good crisis go to waste. EU officials hope the Trump win may drive the EU to issue more joint debt, a common Brussels obsession. Then, they should listen again to the farewell speech of former NATO Secretary-General Jens Stoltenberg. In September, he warned that European countries should avoid “duplicating” NATO defence efforts with EU initiatives. If European countries think that they can continue such duplication in the face of great American pressure for them to double down on their NATO investments, they are deluded.

  

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