Car tariffs are off, but Europe continues to live on the edge

Did President Donald Trump finally learn to distinguish between friend and foe? That is the thought that immediately crossed one’s mind, as the US announced the up-to-six-month postponement of tariffs on European and Japanese cars. The alternative explanation is that you can only fight so many trade wars at once, and after Trump has had his way with China, the spotlight will be back on (erstwhile) US allies.

That is, if the trade war with China ever ends. In the aftermath of Trump banning US companies from doing business with Huawei, a telecommunications giant, an increasing number of Washingtonians think that we are living the new normal. While the ‘New Nafta’ negotiations, focused on nations lopsidedly dependent on US trade, Mexico and Canada, the battle with China is more or less between equals. Of course, the same is true for any trade war with the European Union.

Most intriguingly, the Republican party, free-marketeers, and the more radical right are all falling in line behind Trump. The architect of Reaganomics, Arthur Laffer, does not want to second guess Trump’s negotiating strategy. Former Goldman Sachs CEO Lloyd Blankflein believes that tariffs might be ‘effective’ because they hurt China more than the US. Trump’s former chief strategist Steve Bannon argues that this battle will define ‘what the United States is going to be in the future’, as it highlights how ‘China has been running an economic war against the industrial democracies for now 20 years’.

But the danger is hardly over, even for Europe. First with Brexit and now with auto tariffs the cliff edge has only been moved to late 2019. This is the outlook for the world economy and politics in general and for Europe in particular. At some point, if we do not watch it, someone will actually step off the cliff.

What might prevent that from happening? As distasteful as elements of ramped up rivalry with China may be, it might just do the trick. As a by-product it should remind everyone in the North Atlantic of the importance of the US, UK and the EU – plus at least Canada and the non-EU Nordics – sticking together on trade and much else. Ironically, but hardly uniquely in historical terms, it is precisely this focus on a shared opponent that may save Europe from further tariffs.

Lauri Tähtinen, Head of Research and Analysis

lauri.tahtinen@nordicwestoffice.com