Trump’s Shot Heard Round the Foot
The imposition of steel tariffs on European producers was an unprovoked attack, to which the EU has vowed to retaliate. But instead of engaging in a costly strategy of escalation with their biggest trading partner, Europe’s leaders should swallow their pride and indulge its president's insistence on running the US economy into the ground.
BRUSSELS – The first salvo in the transatlantic trade war has now been fired by the United States, which is imposing stinging tariffs on steel imports from the European Union (as well as from Canada and Mexico). It was an unprovoked attack, to which the European Union has vowed to retaliate. Moreover, US President Donald Trump has announced an investigation into whether car imports threaten national security. Any tit-for-tat response could thus quickly escalate from steel to the automotive industry, which is vital for Europe.
Unfortunately, it seems that emotions and short-term political posturing, rather than economic logic, is dictating the EU’s reaction. For starters, there is a key inconsistency in the discourse of the EU (and other US trading partners). The EU argues that tariffs on steel imports mainly hurt the US itself, and most economists would agree. But this also implies that counter-measures taken by the EU will mainly hurt Europe.
Because the selective tariffs threatened by the Commission will affect finished products, not inputs like steel, the damage inflicted on EU consumers by European countermeasures will be smaller than the damage inflicted on the US economy by Trump’s steel tariffs. But increasing tariffs remains an act of self-harm. Economists are fond of observing that the argument for counter-measures against protectionism abroad is like saying: “If you shoot yourself in the foot, I will do the same.”
The proper response to Trump’s claiming that a larger US steel industry is in the national interest should be: “Mr. President, if you insist that national security requires your country’s industry to receive lower volumes of high-quality European steel, we can help. We will organize a cartel of our producers and ask them to increase the price they charge to US consumers.”
Technically, this would amount to the EU agreeing to what is euphemistically called a “voluntary export restraint” (VER). From a strictly economic point of view, this represents an attractive alternative to tariffs for the exporting country. With the import tariffs on steel just announced, the US will at least obtain some revenue. For steel, the sums involved would be moderate. For example, a generalized import tariff of 25% on steel products could yield almost $4 billion per year, even if imports were to fall by almost half (to $16 billion). This is negligible relative to the US fiscal deficit, which might reach close to $1 trillion this year. But if the EU had agreed on a VER, European producers would have received that $4 billion from higher sales revenues, and for them this sum would have been a very important shot in the arm, allowing them to invest in higher productivity and more sustainable production.
In other words, to the extent that Trump just wants allies to reduce their exports to the US, this can be accommodated by EU producers increasing prices and pocketing the higher revenues – never mind that US consumers of steel would thereby be subsidizing foreign steel producers.
Instead of blustering and showing off long lists of products on which the EU will now impose tariffs, European leaders should signal to the US that they are willing to organize a VER for their steel producers. This is the approach successfully pursued by Korea, whose steel producers do not face a tariff, because they are reducing their exports by charging higher prices and can thus expect much higher profits.
Of course, the immediate objection is, “We are not Korea. The EU is too big to be pushed around like this.” But the harsh reality is that Europe depends on the US security umbrella, and there is little indication that counter measures by the EU will deflect Trump from his erratic course. Cool economic logic should come before misplaced political pride.
The fact that a VER could also satisfy US demand also means that the conventional wisdom underlying trade negotiations does not apply in this case. That wisdom, supported by the “game theoretic” models beloved by economists, suggests that retaliation is indeed the best strategy. But this is true only in a “normal” negotiation where both partners use the threat of tariffs as their main bargaining tool. When one partner (the US) offers to eliminate its tariff in exchange for export restraint, the game is over: this is an offer that is too good to refuse.
The EU has just rejected such an offer, partly owing to a sentiment of wounded pride, but also because EU competition rules might make it difficult to organize a cartel of European steel producers. Moreover, the EU has long fought in the World Trade Organization to make VERs illegal. But these legal and diplomatic niceties can and should be overcome to arrive at a solution that makes economic sense for the EU.
Steel is the issue today, cars might be in the near future, and who knows what other sectors will come after that. Instead of engaging in a costly strategy of escalation with their biggest trading partner, Europe’s leaders should swallow their pride and humor Trump when he insists on running the US economy into the ground.
A Climate-Friendly Response to Trump’s Protectionism
Rather than allowing itself to be dragged into Donald Trump’s destructive trade games, the European Union should turn them on their head, by introducing a CO2 levy, including border adjustment. Such a response would help protect the environment and boost the EU's own international clout.
BERLIN – As US President Donald Trump translates his “America First” strategy into import tariffs, and the European Union prepares to adopt countermeasures moving the global economy toward a trade standoff, the real challenge facing the two economies – indeed, the entire world – is being ignored. That challenge is to shape the global economy, including trade, so that it finally respects the planet’s natural boundaries.
Trump’s trade agenda is putting progressives into a paradoxical position. For many years, they have been denouncing the current trade system as both unjust and ecologically destructive. But in the face of Trump’s nationalist protectionism, with its echoes of the fatal mistakes of the 1930s, some feel obliged to defend the current system.
Neoliberal defenders of the status quo now see a political opportunity. Lumping progressives together with Trump as “protectionists,” they are denouncing the justified wide-ranging protests of civil society against mega-regional deals like the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada, and the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the United States.
In order for progressive politics to succeed, its proponents need to go beyond defending the existing trade system against Trump. They need to go on the offensive, which means pressing for reforms intended to create a just, equitable, and rules-based international trade order. Otherwise, Trump-style economic nationalism will continue to resonate with a large share of the population, in the US and elsewhere.
For starters, with the EU debating countermeasures to US tariffs of 10% on aluminum and 25% on steel, it is worth looking beyond the economic significance of the dispute, to the ecological aspects of the commodities in question. For example, steel production, which uses metallurgical or “coking”coal, accounts for roughly 5% of global CO2 emissions.
This is not inevitable. Steel can be replaced by less emissions-intensive alternative materials. It can also be produced with much lower emissions. Swedish producers are researching virtually CO2-free steel production using electricity and hydrogen acquired from renewable energy sources. And the German multinational thyssenkrupp is developing a process using exhaust fumes from steel production as a feedstock for chemical products and synthetic natural gas, lowering carbon pollution.
But these alternatives will not be viable as long as the established steel industry is permitted to use the atmosphere as a free dump for CO2 emissions. Economists across the political spectrum agree that one key to limiting greenhouse-gas emissions is to make it more expensive for companies to produce them – so expensive that climate-friendly options become cheaper in comparison, and thus competitive. That is why the German Green party is calling for a floor price on CO2 emissions to be established as part of the EU’s Emissions Trading System. The state of California has already done so in its trading scheme. We want to lead the way, together with France, in Europe.
Such proposals have met with strong resistance. Many argue that a high price for emissions in Europe would give foreign producers a competitive edge in the EU market. Moreover, because production would simply move abroad, the logic goes, the environment would ultimately be no better off overall.
Despite its weaknesses, this argument has impressed European policymakers. But there is an obvious workaround: a duty could be imposed on emissions-intensive imports – like steel, cement, and aluminum – at the EU border. This would be an important step toward a just, climate-responsive trading system. The duty would be fair, because environmental rules would apply equally to European and foreign products. And as long as the same levies were imposed on locally produced goods, such “border carbon adjustment” would not violate World Trade Organization rules.
By enabling countries committed to environmental protection to push back against those that are not, this strategy would help align the global trading system more closely with ecological imperatives. Policies such as border carbon adjustment are not narrow-minded national protectionism, but a necessary reaction by countries committed to climate protection. Nor is it a new idea: every climate bill that failed in the US Congress in 2009 included such a mechanism.
Rather than allowing itself to be dragged into Trump’s destructive trade games, the EU should introduce border carbon adjustment in order to foster a climate-friendly system. French President Emmanuel Macron is already a vocal supporter. A group of researchers representing MIT, the German Institute for International and Security Affairs, and other leading institutions, has already developed a set of concrete proposals regarding how to implement such a program. By doing so, the EU would make the case for fairer and cleaner trade.
By demonstrating that a lack of commitment to climate protection comes with a price, such a response could spur change elsewhere, including the US. For example, it might encourage the Trump administration to reconsider its withdrawal from the 2015 Paris climate agreement, particularly if European actors reached out to likeminded progressives in, say, California or New York. Even if Trump remains unmoved, a CO2 levy might deter his potential imitators elsewhere.
With such a calibrated and forward-thinking response to Trump’s narrow-minded protectionism, the EU would cement its role as a trailblazer in the quest for a fairer, more sustainable trading system. In doing so, it would not only help protect the environment on which we all depend, but also boost its own international clout. That, not a trade war, is what the world needs now.
Why “America First” Means “Europe United”
Between the United Kingdom's withdrawal from the European Union and US President Donald Trump's increasing aggression toward it, many fear that the EU is facing more challenges than it can handle. But, as Europeans well know, there is nothing like a crisis to get the integration process moving again.
BRUSSELS – One of the main arguments made in support of the United Kingdom’s withdrawal from the European Union is that the UK will be able to negotiate better trade deals with other countries – and even with Europe – if it is on its own. According to Brexiteers like British Foreign Secretary Boris Johnson, because EU member states are too divided and consumed by their own crises to defend the integrity of the European project, “There is only one way to get the change we want – vote to leave the EU.”
But with less than a year remaining until “Brexit day” – when the UK’s EU membership officially ends – it is clear that the British government’s hopes of dividing and conquering the EU economy have been dashed. EU member states have remained impressively united throughout the Brexit negotiations. And while Brexit itself is nothing to celebrate, the process has at least shown that Europe is strongest when it is challenged.
In fact, for many Europeans, the EU seems to have returned from the dead. Slowly but surely, French President Emmanuel Macron and German Chancellor Angela Merkel – the bloc’s two most powerful leaders – have shown signs of coming together to pursue long-overdue EU-level reforms.
Moreover, despite the formation of an anti-establishment coalition government in Italy, and the rise of populist parties across Europe, opinion polls suggest that support for the EU is now higher than it has been in decades. According to a recent Eurobarometer survey, if a referendum on EU membership were held today, 83% of Europeans would vote to remain in the bloc; and a record-high 60% regard EU membership as a “good thing” for their country.
In other words, while populism can certainly sow political divisions within the EU, there is little evidence that Brexit itself has caused a domino effect. The Brexit ringleader Nigel Farage might like to think that Italy’s new populist government represents a success for his brand of go-it-alone nationalism, but it turns out that Europe’s populists are of a different breed than those in the UK. Though financial markets have grown skittish at the prospect that Italy’s new leaders could drive their country out of the eurozone, polling conducted after the election in March showed that 60-72% of Italians would not support such a move.
Still, recent polling does reveal more ambivalence about the EU’s current trajectory. Just 32% of citizens believe that “things are going in the right direction” for the EU, whereas 42% think the bloc is on the wrong path. The question for most Europeans, then, is not whether to destroy the EU, but how to improve it.
Owing to the lingering effects of the 2008 financial crisis and the subsequent eurozone crisis, the EU has failed to implement necessary reforms. But now it has a window of opportunity to act, because the truth about Europe’s dangerous new geopolitical reality is finally hitting home for many in the EU.
After all, the unifying challenge that Brexit has posed to the bloc pales in comparison to that presented by Donald Trump. The US president’s disdain for NATO, and the revelations about his campaign’s contacts with Kremlin-connected Russians prior to the 2016 election, have made it abundantly clear that Europeans can no longer rely exclusively on the United States for their security.
Moreover, Trump’s decision to subject the EU (as well as other US allies such as Canada and Mexico) to import tariffs on steel and aluminum has unified European leaders in outrage and disgust. And his suggestion that German cars should be cleansed from US streets – despite the fact that many “German” cars are actually built in the very US states from which he draws his support – may help Germans realize that they need other Europeans’ help to protect their auto industry.
Trump’s tariffs have thus provided a perfect opportunity for Germany’s grand-coalition government to meet Macron halfway on his ambitious proposals to reform the EU and the eurozone. It is time for Germany to be more open-minded about the needs of Southern European countries.
Trump’s “America First” policies represent a misguided return to the naked nationalism and protectionism of a bygone era. They pose a direct threat to the post-war international order that has underpinned prosperity and stability for 73 years. And yet they could also be just what the long-stagnant European integration process needs.
Trump revels in the chaos he sows. He regards international relations as a zero-sum game of winners and losers, and, to the extent that his foreign and trade policies make any sense at all, they are transactional. By contrast, the EU’s modus operandi is one of collaboration and compromise. And now that these two worldviews are colliding, each is likely to be emboldened.
In addition to Brexit and Trump, Russian President Vladimir Putin’s revanchism and China’s growing assertiveness are upending the global order. But, as we Europeans well know, there is nothing like a crisis to get things moving again. We have avoided tough decisions for decades. Now, we must decide what we want Europe to be in 2050, and beyond.
Merkel’s Comeuppance is Europe’s – and the World’s – Misfortune
No one who was paying attention to Greece's predicament three years ago should be surprised by the position that German Chancellor Angela Merkel and Europe find themselves in today. But only a dangerous fool would celebrate.
JOHANNESBURG – One of the most common mistakes European leaders make in interpreting US President Donald Trump’s hostility toward America’s traditional allies, or the alacrity of his administration’s efforts to blow up the international order, is to assume that all of this is unprecedented. Nothing could be further from the truth.
“My philosophy is that all foreigners are out to screw us, and it’s our job to screw them first.” Thus argued John Connally, then-US Secretary of the Treasury, in 1971, in his successful bid to convince President Richard Nixon that the time had come to punish Europe by pulling the plug from the Bretton Woods system.
Likewise, Trump would certainly agree that, “balancing the requirements of a stable international system against the desirability of retaining freedom of action for national policy,” the US wisely “opted for the latter.” That was Paul Volcker, then the president of the New York Federal Reserve, referring to Nixon’s decision in a speech seven years later. The future Chair of the US Federal Reserve further declared that a “controlled disintegration in the world economy …[was] a legitimate objective for the 1980s.”
What distinguishes today’s situation from the one Europe faced in the 1970s is the Weimar-like implosion of Europe’s political center. In the 1970s, America’s financial assault on Germany, France, and Britain (for example, by floating the dollar) was met by a united European establishment. By contrast, today’s defenders of the European status quo must fight on two fronts: against Trump’s encroachments and, within Europe, against the likes of Matteo Salvini and Luigi di Maio, the rising stars of Italian politics who, despite their parliamentary majority, were denied the right to form a government by the country’s besieged pro-establishment president.
The US announcement of tariffs on steel and aluminum imports, while ostensibly aimed at China, was also the latest signal to Europe that the Trump administration’s “America First” rhetoric must be taken seriously. Next came the US withdrawal from the Iran nuclear deal, which offered Trump yet another splendid opportunity to luxuriate in Europe’s powerlessness, and especially that of German Chancellor Angela Merkel.
Forced to insist that Germany, the European Union’s most populous country and its largest economy, would uphold the Iran deal, Merkel found herself immediately humiliated as one German company after another pulled out of Iran. All were unwilling to challenge US financial might or to forfeit the tax cuts Trump had delivered to almost 5,000 German companies with a combined balance sheet of $600 billion. And, before the Iran shock had been absorbed, the US threatened a 25% import tariff on cars, which would shave at least $5 billion annually from German exporters’ revenues.
Grave as these setbacks may be, the scale of Germany’s difficulties can be comprehended only once their causal link with developments in Italy is grasped.
Just as it is Trump’s aim to overturn the global system from which Germany has benefited for decades, Salvini and di Maio see the disintegration of the euro as a welcome development and a boon to their anti-immigration campaign. Just over three years ago, when I was negotiating on behalf of Greece with the German government to end the combination of unsustainable loans and hyper-austerity that are still crushing my country, I warned my interlocutors at a Eurogroup meeting of eurozone finance ministers:
“If you insist on policies that condemn whole populations to a combination of permanent stagnation and humiliation, you will soon have to deal not with Europeanist leftists like us but, instead, with anti-Europeanist xenophobes who see it as their vocation to disintegrate the European Union.”
That is precisely what is happening now. Having vetoed much-needed EU reforms, Merkel’s successive governments guaranteed Europe’s fragmentation. Germany’s establishment media are now referring to the Italian economist whose appointment as finance minister was vetoed by the president as “Italy’s Varoufakis.” That moniker obscures a fundamental difference: I wanted to keep Greece in the eurozone sustainably and was clashing with Germany’s leaders in favor of the debt restructuring that would make this possible. By crushing our Europeanist government in the summer of 2015, Germany sowed the seeds of today’s bitter harvest: a majority in Italy’s parliament that dreams of exiting the euro.
The causal link between Germany’s two political headaches has an economic basis. Trump understands one thing well: Germany and the eurozone are at his mercy, owing to their increasing dependence on large net exports to the US and the rest of the world. And this dependence has grown inexorably as a result of the austerity policies that were first tried out in Greece and then implemented in Italy and elsewhere.
To see the link, recall the “fiscal compact” to eliminate structural budget deficits that Germany insisted upon as a condition of agreeing to bailout loans for distressed governments and banks. Then note that this pan-European austerity drive took place against the backdrop of massive excess savings over investment. Finally, note that large excess savings and balanced government budgets necessarily mean large trade surpluses – and thus the increasing reliance of Germany, and Europe, on massive net exports to the United States and Asia. In other words, the same incompetent policies that gave rise to the xenophobic, anti-Europeanist Italian government also bolstered Trump’s power over Merkel.
Europe’s inability to get its own house in order has engendered a new Italian majority that is planning to expel a half-million migrants, blowing fresh winds into the sails of militant racists in Hungary, Poland, France, Britain, the Netherlands, and, of course, Germany itself. Meanwhile, with Europe too enfeebled to tame Trump, the US will aim to force China to deregulate its financial and tech sectors. If it succeeds, at least 15% of China’s national income will gush out of the country, adding to the deflationary forces that are breeding political monsters in Europe and in the US.
All of this was predictable – and in fact was predicted. So no one should be surprised by the position in which Merkel and Europe find themselves today. But only a dangerous fool would celebrate.