A flurry of media reports in recent days (e.g. here, here) have suggested that EU policymakers are stepping up contingency plans to respond to the imposition of tariffs by the US should former president Donald Trump win the US election on November 5.

• Commentary so far has fairly consistently highlighted two expectations:
  • That the EU would offer Trump an almost immediate deal, before he even took office in January, in a bid to avoid a trade war.
  • But, should that fail, the European Commission would then plan to respond “fast and hard” with tariffs of its own, attempting to avoid drawing out a trade war through slow, tit-for-tat escalation (i.e. in the hope that a tough, immediate reaction might see the dispute come to an end faster).

As we have previously stated (e.g. here and here), we are pessimistic as to the odds that Trump might ‘go soft’ on Europe once in office, if elected. Consequently, we see three takeaways for future EU policy:

• (1) The EU is likely to not just find itself in a trade war with its biggest trade partner in the event of a Trump victory, but that trade war would occur very early on.

• (2) The Commission’s ‘de-risking’ efforts towards China would likely be put on hold, as:
  • There is already disquiet from some member-states (e.g. Spain and Germany) over the imposition of tariffs on Chinese EV imports; their (and peers’) tolerance for trade friction with China will be even lower if the EU is simultaneously engaged in a trade war with its biggest trade partner…
    • Particularly as China is likely to use the situation to try to re-boot trade relations with the EU (perhaps by offering more carrot than stick).
  • This having been said, we do not believe the EU will drop already-imposed tariffs on Chinese EVs.
    • Indeed, while we are skeptical of the argument that the EU has much chance of appeasing or preempting the Trump administration’s wrath by aligning its China policy to Washington’s, we do think Brussels will be hesitant to ‘provoke’ the incoming US administration with such a dovish move.

• (3) The combination of a trade war with the US and a reduction in the appetite to confront Chinese competition will significantly boost the chances of new joint-debt issuance, as:
  • The reduction in appetite to confront China means less focus on protectionism, leaving subsidizing business as one of few proactive policies left to support struggling EU industry.
  • From both China and the US, the threats are to the EU’s industrial base; with EU industrial production already suffering, a further 4 years of an even tougher outlook is likely to reach the “crisis” threshold needed for such action.
  • Some of the main opponents (in particular, Germany) have been highlighted by Trump as his primary targets, and would likely be the hardest hit (e.g. given likely US tariffs on EU auto exports), giving them a ‘personal’ incentive to adjust their longstanding opposition stances.