Donald Trump has bagged an extraordinary trade deal. From now on, most EU exports to the US will be subject to a 15 per cent tariff, which will raise tens of billions of dollars in revenue for the US Treasury. Tariffs on US car exports to the EU will be lowered to 2.5 per cent, while Brussels has agreed to purchase $750 billion worth of natural gas, oil and other energy imports from the Americans. Trump has won the negotiation: game, set and match.
From the American point of view, a trade reset with the EU was essential. The EU has enjoyed a huge trade surplus with the US for decades, with the 2024 deficit amounting to $235 billion. Running trade gaps of this size will eventually beggar your nation, because it necessitates the selling of assets and the raising of debt to pay for imports. This is not a theory, it is merely the mathematics of international trade. Trump and his vice-president, JD Vance, are right to address the problem directly.
Those of us who support trade protectionism as a tool of industrial policy tend to advocate two approaches to tariff policy. First, one can adopt a cautious attritional approach whereby a moderate tariff – say, 10 per cent – is applied to all imports and increases gradually until the trade deficit is eliminated, or reduced to acceptable levels.
Alternatively, you can adopt Trump’s ‘shock and awe’ tactics by threatening unfeasibly high tariffs, targeted at nations with very large bilateral trade surpluses, in the hope that deals will be struck. This bold approach seems to have worked for the US. As the August deadline for his punitive tariffs has arrived, panic has ensued, many nations have capitulated to his revised terms and deals have been struck.
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