EU Affairs  30% tariffs. In what world does this make cents?

The 90-day pause on Trump’s liberation day tariffs was meant to end on 9 July. But of course, consistent with his inconsistent methods, the President has brought around a new ultimatum deadline, 1 August.

Upon 1 August, countries around the world will have either, ideally, secured some form of deal with the US, or will less ideally, brace for increased tariff measures. Nations around the world were sent letters in the first couple of weeks of July outlining how their tariff rate would change without a deal. For example, Brazil’s 10% 2 April rate would increase to 50%. Mexico and Canada, which didn’t originally receive additional tariffs on liberation day, could be subject to 30% and 35% respectively on 1 August.

Some nations will be relieved that their letter contained news of tariff reduction, such as Sri Lanka, which could see their rate cut from 44% to 30%, or Moldova, from 31% to 25%. And so far, China, Vietnam and the UK are the only nations to have managed to secure a deal, or at least an agreement in principle, shielding them from the worst of the levies.

The EU is in Trump’s sights. Despite reports that the EU and US are nearing a conclusion on negotiations, the President has threatened a 30% tariff on imports of EU goods on 1 August. Frustration high, there is now appetite for retaliation across 27 member states.

However, Brussels is trying to find the fine line between ensuring negotiations can continue and creating a realistic counter threat from retaliation.

The preferred outcome is certainly to find a negotiated solution and sign a deal. Maros Sefcovic, EU Commissioner for Trade and Economic Security, has warned that the tariffs of 30% on EU imports would make transatlantic trade almost impossible.

Oxford Economics’ Global Economic model estimates that 30% tariffs could cut Eurozone GDP growth by up to 0.3% annually over the next 2 years. Goldman Sachs’ forecast is slightly worse, with reports suggesting their estimation is a 1.25% cut to GDP over the next 18 months.

Thomas Byrne, Ireland’s Europe Minister, notes the extent to which these ongoing talks are having an impact on investor confidence, and increased instability. However, he recognises that this is perhaps better than a full-blown trade war.

Because at the same time, Sefcovic is proposing a new package of possible retaliatory tariffs against the US involving €72 billion worth of tariffs on US goods, including on bourbon, Boeing aircraft, chemical products and medical devices.

Even if retaliation is not economically the favoured solution, the EU wants to be in a position where they can present a legitimate deterrent, which means they have to be ready to commit to tariff retaliation if and when it comes down to it. The Danish Foreign Minister, Lokke Rasmussen, remarked that it is necessary to flex some muscles: “if you want peace, you have to prepare for war, and I think that’s where we are”.

The EU is also exploring a cooperative response with G7 countries to coordinate on retaliation.

Another alternative, though one that is seen as a ‘last resort’ option, is the EU’s anti-coercion instrument (ACI). This was a measure first drawn up in response to geopolitical tensions and weakened international cooperation, with its primary objective being deterrence.

The ACI permits import and export restrictions to be placed on goods and services, intellectual property rights and foreign direct investment. It would also enable the EU to restrict access to its market, notably public procurement and restrictions to funding.

It’s something that is floating around the conversations on this at the moment, and whilst the ACI would be an extreme act to take, European Commission President Ursula von der Leyen has said that all instruments are being considered.

Von der Leyen’s battles are not constrained to the international arena. On home soil, she is juggling the needs of 27 EU member states as she delivers the EU’s budget for 2028-2034. The focus of the budget will be defence and competitiveness, rooted in such a changeable geopolitical landscape. But this will mean making cuts elsewhere, and the EU’s budget department is thinking of taking from the EU’s farming and regional budgets, which currently make up two thirds of the cash pot.

Restructuring the regional budgets to form a new national pot from which to determine regional spending is a big point of contention. On one hand it could be good for streamlining spending for bigger impact. On the other, some individual nations are concerned that a restructuring would give greater empowerment to national institutions at the expense of the regions.

The EC President has also been considering how to increase tax revenue to cover Covid-recovery debt, for example with levies on non-recycled electric waste, tobacco products and EU companies with a turnover of over €50 million.

And, circling back to the important point that it’s the White House administration which is responsible for much of the changeable geopolitical landscape, plans for a 3% tax on digital companies have been dropped. This might not be a move strong enough to placate Trump into ditching the tariffs altogether. But it’s certainly a win for big US tech companies like Apple and Meta, and therefore looks like something of a strategic gambit to meliorate any further transatlantic tensions.