EU: Trump 2.0 pain still under-appreciated

• Several commentators (ranging from former Trump National Security Advisor Robert O’Brien to European Central Bank Governing Council member Joachim Nagel) have warned that a second Trump administration would carry large economic risks for Europe. Not only do we agree with this view, which has long been ours as well, but we would go a step further and argue that Europe is likely to be the greatest ‘loser’ from a Trump 2.0 administration – even above China – for the following reasons:
  • 1) Atmospherics: Former President Donald Trump likes to speak of his respect, if not admiration, and fondness for Chinese President Xi Jinping. There is no such mutual appreciation with his European counterparts to help ‘smooth over’ difficult conversations.
  • 2) Punitive approach: We are not convinced that Trump-imposed tariffs on the EU would be aimed at achieving transactional outcomes (i.e. lifting the tariffs in exchange for substantive European concessions). Instead, a Trump White House is arguably more likely to use tariffs to double-down on the US’s edge in FDI attractiveness in recent years – further cementing the US’s lead over the European economy.
  • 3) Collective action: Whereas Trump is able to negotiate in harsh but clear-cut terms with individual leaders such as China’s Xi or Mexico’s Claudia Sheinbaum, any meaningful concessions by the EU would require garnering the support of 27 member-states whose interests and incentives have proved starkly different in recent episodes ranging from the EU’s tariffs on Chinese electric vehicles to finalizing the EU-Mercosur trade negotiations.
  • 4) Technical thorniness: Most of the issues pitting the US and EU – whether it be the carbon border adjustment mechanism, deforestation, digital and minimum corporate taxes, steel overcapacity, or aerospace subsidies – are highly technically complex, making even the most ‘well-intentioned’ efforts at addressing them difficult – let alone more brusque attempts.
  • 5) Fatigue and blowback: Finally, whereas European policymakers may have been willing to appease the Trump administration in its first term, their patience is likely to be more limited during a second Trump mandate, despite their remaining in the weaker position – thereby increasing the risk of two-way trigger-happiness.