Nearly a fortnight into Donald Trump’s tariff war, Europe’s leaders are already taking sides. Italian Prime Minister Giorgia Meloni will pay homage to the American President later this week, while Spanish Prime Minister Pedro Sánchez dropped in on China’s President Xi Jinping on Friday. At this rate, the feuding superpowers could carve up the Continent.
Even before the tariff tiff, Europeans were at risk of a geopolitical squeeze between the US and China. In trade, this is now happening. Despite Trump’s U-turn last week, we are still in a worst-case economic scenario. American tariffs on Chinese imports are now 145% — a level at which nations stop trading, even if Trump has since made an exemption for electronic goods and components. In all this, Europe emerges as the loser: it is far more exposed to trade shocks than America because it relies more on foreign trade.
How, then, can Europeans protect their interests? My advice is first and foremost not to get distracted by military matters. What is the greater threat to Europe — the US abandoning multilateral free trade, or a Russian invasion of Northern Europe in the mid-2030s? In the short term, it’s the former. While Russia has strong defence capabilities, it will not have the resources to fight another big war for at least 10 years. Europe will need to get its military in shape before then, but this is a medium-to-long-term job. By contrast, the split in the transatlantic alliance and the assault on the international trading system is taking place right now. It’s the threat we should be most focused on today.
An adequate response to this threat would require deeper co-operation between the EU and the UK. But this means not getting sidetracked by another Brexit debate. When the European Commission announced it would open talks with the UK on defence co-operation, France immediately suggested that this would be a good moment to re-open the EU-UK talks about fish. Never underestimate the level of pettiness in European politics.
The most immediate joint action I would recommend is a co-ordinated macroeconomic policy response in the form of a fiscal stimulus for consumption and investment. Perhaps Canada could be roped in, or even China. Now is a great moment to do this because it would protect Europe and the UK from a sharp recession — plus, it wouldn’t cost very much. The infamous bond vigilantes are currently busy fighting Trump — and they can’t fight on two fronts at once. Last week, the US bond market came close to seizing up, as people lost confidence in the future role of the dollar as a global reserve currency. If you move your money out of the US, you have to move it somewhere. This is why the euro is rising against the dollar.
Economic stimulus would not only mitigate the economic downturn in Europe, it would also help to rebalance the global economy. The problem of global imbalances is not really about trade, as Trump erroneously insists. It’s about the US saving too little, and the rest of the world, especially China and the EU, saving too much. The difference between what a country saves and what it invests is approximately the same as the difference between what it exports and what it imports. It is the financial side of this equation that drives the product side, and not the other way round.
If the EU, the UK, Canada, and perhaps even China came together to agree on a joint stimulus, it would be a win-win for everyone. If the Trump administration is genuinely keen to solve the problem of global imbalances, as members of Trump’s team suggest, then they should welcome such an antidote.
My next suggestion will probably go down less well with the Americans. The EU and UK should begin to replace a traditional diplomacy centred around relationships with a diplomacy that prioritises the national, or European, interest. After all, Trump’s tariffs do not benefit Europe: not a single European country can align with Trump on this issue and emerge victorious.
If the US and China decide to fight it out, Europe would be wise not to take sides. Keir Starmer, the UK prime minister, has so far refrained from doing so: “We shouldn’t jump in with both feet to retaliate”, he told the Liaison Committee of the House of Commons. This is exactly the right thing to do. And Europe should follow his lead by staying neutral. After all, Trump is not our friend. He could not care less who wins the Russia-Ukraine war, in which he casts himself as a neutral arbiter. He does not play on our team.
“If the US and China decide to fight it out, Europe would be wise not to take sides.”
Europe should see the US and China as strategic competitors, not as enemies. For the EU, now would be a prime moment to revisit the EU-China investment agreement. Angela Merkel and Emmanuel Macron negotiated the deal with President Xi in 2020, but the European Parliament shelved it a year later, after China banned a few MEPs from visiting. The relationship became frosty, though it has been thawing lately. When Rachel Reeves, the UK chancellor, visited China recently, she came out in favour of greater co-operation. It would be easier to co-operate, however, if the EU, the UK, and Canada acted together. If only we weren’t so afraid of provoking Trump’s fury.
Of course, any co-operation with China must respect national security interests. It would be wrong for Europe or the UK to rely on China for critical infrastructure — we should not revert to the bad old days when we did not care about security. But co-operation is not the same as dependency. The goal is to make sure that the global trading system can continue to function, with or without America.
The alternative to this would be dire. The US and China could someday stop trading with one another altogether. In such a scenario, China would start selling its unsold goods to Europe at knock-down prices, driving European competitors out of business. The EU and the UK might then respond by imposing tariffs on China. As we saw last week, China would retaliate immediately. The world trading system would suffer a cardiac arrest.
Yet while greater co-operation makes perfect sense for the EU, the UK might be wary of it. The island nation is still holding out for a trade deal with Trump, and hoping that the President will drop the 10% tariff. If this were to happen, the UK would find itself in a very small group of privileged American trading partners. China will clearly not be part of that group. And I doubt the EU will be either, especially if Trump imposes a 20% tariff on the bloc, and it retaliates. Perhaps South Korea, Vietnam, or Japan will make the cut.
But this would mean the world splitting into competing tariff zones, with the EU and the UK on opposite sides of a new global tariff border. And if Trump and Starmer were to agree to a trade deal, Trump would almost certainly insist that the UK mirror US tariff policy. He could not otherwise impose different tariffs on different countries.
Would this make sense for the UK? In 2023, the UK imported £115 billion of goods and services from the US and exported £187 billion. That same year, it imported £466 billion from the EU and exported £356 billion. So the UK imports roughly four times as much from the EU as it does from the US. And it exports twice as much to the EU than it does to the US. The trade numbers with China are smaller, but it all adds up. With this in mind, it would not make sense for the UK to break with the EU and Canada to join Team America.
Naturally, trade numbers are not cast in stone. They would change if the UK were to align with the US. In a world where many services are delivered digitally, and where container shipping is cheap, geography matters less than it used to. And there is at least one scenario in which it would benefit the UK to align with America: if the EU were to retaliate against American tariffs, the UK would be foolish to join in. Post-Brexit Britain cannot afford a tariff war.
The UK and the EU have three options now: align with the US, become more independent, or do nothing and let others decide their fate. My own preference would be the second course of independence. My hunch is that the UK will try to stick with its traditional alliance with the US for as long as possible. I see the EU splintering: Italy, under Meloni, will align with the US. So will Hungary. And so may some eastern European countries that prioritise security over trade. Meanwhile, France will seek greater independence, and Spain will favour a closer alliance with China.
What about Germany? Friedrich Merz, the presumptive next German chancellor, would be more inclined than any of his predecessors to seek a closer alliance with the UK. He did not agree with the EU’s negotiating position on Brexit. What the Germans and the British have in common is that they are instinctive free traders. If there is any hope for Europe to lead a world of free-trading nations, Germany and Britain would need to be at the forefront.
This is, after all, a time for action. Either we rise to the occasion now, or else we allow the era of global free trade to slip from our fingers — and with it, all our prosperity.
