Europe's Retaliation Strategy: Targeting America's Weak Spots

Since last year, the US has imposed a 15 per cent tariff on European Union exports and 10 per cent on the UK following bilateral deals signed after April. There are exemptions for most pharmaceuticals and higher rates applied to steel and aluminium. If the new levies stack on top of existing tariffs, they will have sizeable implications. Should cars and pharma be included in new tariffs rising to 35 per cent, the UK could suffer a total 0.75 per cent hit to its GDP, according to Capital Economics. That is more than half the annual growth rate of 1.3 per cent forecast for this year. For the dozen EU economies threatened by Trump, Germany will be the biggest loser and is facing a 1 per cent GDP hit that could push the economy back into recession after three years of stagnation. The Netherlands is facing a similar 1 per cent impact. These are worst-case scenarios for large economies barely recording more than 1 per cent annual growth rates. The hit to exporters is as important as the signalling effect from a US administration that has shown time and again that it has little regard for European security or sovereignty. As ever with Trump, this new round of tariffs may not materialise. But European governments cannot keep praying for a deus ex machina. In April, it was the bond market convulsion that forced the White House into a tactical retreat. Not so this time. The dollar and US bonds have hardly reacted to the Greenland threats. It is telling that Scott Bessent, Trump’s Treasury secretary, who lobbied the president to step back from sweeping tariffs in April for fear of a market backlash, was the first senior official to double down on tariffs over the weekend. Europeans also assumed they could tolerate tariffs on their exporters longer than US consumers would be willing to tolerate the self-inflicted pain of higher prices. But the widely forecast surge in inflation has yet to materialise at scale, as firms have taken on the costs in their margins rather than passing them all on to households. This is why Trump is still resorting to tariffs eight months on from that so-called liberation day. The latest quiet hope for Trump’s adversaries is a pending US Supreme Court decision that could wipe away around two thirds of tariffs applied using emergency executive powers. The Greenland tariffs would fall under this category and could be nullified by the court’s decision. The ruling may land in the next 48 hours. It would represent the biggest blow against the president’s attempts to weaponise tariffs to further his foreign policy goals, but the administration can still apply levies on a temporary basis and is planning contingency measures. The US collected an additional $200 billion in customs duties last year, a windfall that is too fiscally important for Trump to lose. In Europe, “Trump Always Chickens Out” is more a prayer than reality. Yet the last year has also shown the value of fighting back. China has expertly weaponised its raw materials dominance to force Trump into a defeat. The Greenland grab should be the tipping point for European governments who have failed with flattery and capitulation. The humiliating EU-US “Turnberry truce” is all but dead, as the European parliament will not now ratify the agreement. The EU is likely to revive the €93 billion of retaliatory measures it put on hold for that deal. The bloc’s “bazooka” — which is the triggering of an anti-coercion instrument that would allow for wide-scale economic retaliation — is being pushed by France, but is unlikely to win support from the likes of Germany. If the EU is finally serious about standing up to Trump, it has to look beyond its trade armoury. Financial weapons and targeting US tech firms are the real nuclear options. On the first, there are suggestions the continent should leverage its position as America’s largest creditor. George Saravelos at Deutsche Bank notes that European countries own “$8 trillion of US bonds and equities, almost twice as much as the rest of the world combined … It is not clear why Europeans would be as willing to play this part.” But dumping US assets en masse to drive up interest rates and trigger a financial wobble is not a credible threat. Those assets are in the hands of European banks and the private sector, not public authorities. Brussels would be wiser to consider how it can incentivise its home investors to hold home debt and penalise those who hoard US treasuries. This would be a slower-moving diversification out of dollar assets. On the tech side, the bloc still has an outstanding case on whether Google should be broken up. This should be taken in light of the harsh geopolitical reality. Brussels should enforce, not water down, its digital rulebook. Tech firms have lined up behind the administration, which has done their bidding to win exemptions from European taxes. The EU has all the tools at its disposal to show Big Tech there is a price to pay for their political choices.