The EU Needs a Smarter Trade Negotiation Strategy

In his July 12 letter to the EU, President Donald Trump rejected an emerging US-EU trade deal. Negotiators now have until August 1 to strike a better one. Failure to do so will result in 30% tariffs on the bloc’s exports to the United States.

The EU’s lead negotiator, Commissioner Maroš Šefčovič, flew to Washington in mid-July for a fresh round of talks that stalled. It would have been politically untenable for him to return with an asymmetric deal that removed most trade and non-trade barriers for US exports to Europe while leaving US policy little changed.

Many in Europe still argue that the EU’s negotiating approach is failing. Rather than focus on talks, they say, the bloc should focus on retaliation by, for example, hitting US goods exports or using the EU’s Anti-Coercion Instrument (ACI) to restrict market access or slap higher tariffs on exports from coercive countries. Only by hitting the United States where it hurts will Washington back down, these Europeans claim.

The reality, however, is more complex. The EU still depends on the United States for its security, and many EU capitals worry that retaliation would lead to reduced military support. Trump’s team is also far more prepared now than it was under the first administration. It has analyzed the EU’s options and knows that the United States can hit back—and hard—against the ACI, for example by sanctioning European banks and companies or cutting them off from the US market and the dollar. Many EU officials also believe that escalation would weaken their hand in future negotiations on the forthcoming Section 232 tariffs, including on pharmaceuticals and semiconductors—which Trump has argued could reach as much as 200%.

The EU needs a different and smarter approach—one that combines a willingness to take a tough stance with a new strategy of diplomatic engagement. The EU should highlight the risks of high tariffs for key supply chains, investment, and jobs throughout the United States. For this strategy to work, the European Commission will need to work more closely with the private sector and speak more publicly about the risks of having no negotiated settlement.

A Different Kind of Negotiation

The EU is known to be a formidable negotiator. Or at least it was.

Take trade deals: It has more trade agreements than any other country or group of countries—70 to be exact—with many more underway, including with major economies such as India’s and Mercosur’s. Its negotiation process reflects years of fine tuning: appoint the best team, keep member states and the European Parliament in the loop, know who you are negotiating with, and, crucially, prepare for all eventualities.

The difficulty with tariff talks with the United States is that they are a different kind of negotiation. For starters, it is the president who has the final word. The goalposts keep changing and the Trump administration has been using this tactic to its advantage. US and EU negotiators have been working tirelessly, but it appears that Trump may not want a win-win deal. This is a hard sell for the EU. A wholly asymmetric deal would hurt the bloc’s economy and make Brussels look politically weak. At the same time, walking away without trying for a deal is equally unacceptable for Europe. A compromise would be a deal that is not fully asymmetric and is, at a minimum, no worse than the one the United Kingdom got.

Then there is the question of future trade-offs. In the case of the US-UK deal, for example, the United States made future tariff relief contingent on the United Kingdom’s agreeing to water down its digital rules and adopt measures that resemble export controls and investment screening mechanisms. These are key components of the US economic security measures to contain China. It is unclear if the EU would accept this, or if this would be sufficient to shield it from higher tariffs down the line.

Overall, the EU has preferred to tread carefully, choosing negotiation over escalation, and muted language over public spats. It has held off on implementing other, nontariff actions such as digital taxation, which Trump has criticized as unfairly hitting American companies. It has prepared but held off imposing retaliatory tariffs on two packages of US goods, one worth $25 billion and another covering $84 billion more, including aircraft, cars, machinery, chemicals, fruits, vegetables, bourbon, and rum. Commissioner Šefčovič and US negotiators also know that escalating tariffs would hurt the EU more due to the Europe’s heavier reliance on trade as a proportion of GDP. According to the World Bank, US GDP is 25% trade dependent, whereas in Germany it is closer to 80% and in France 67%.

A More Nuanced but Targeted Approach

The EU needs a more nuanced approach—one that protects its interests, but also involves speaking much more widely about the risks of high tariffs for the United States.

First, the EU should remind Washington that it has things it wants and needs. For example, Europe has real leverage over the United States when it comes to precision machinery—machine controls, industrial systems, high-end farming, and factory equipment—and speciality chemicals as industrial inputs. As Richard Baldwin from the International Institute for Management Development outlines, these are all imports the United States wants and needs, and European industry is much less dependent on equivalent US imports. Any disruption could seriously hurt American manufacturing and expose vulnerabilities such as those related to rare earth minerals revealed during the China-US escalation in April. This matters at a time when Trump is keen to accelerate manufacturing and create more jobs.

Second, the EU should be talking much more widely and loudly about the implications of these tariffs for the United States. European companies and their subsidiaries in the United States—including Aldi, Food Lion, Ikea, BMW, Mercedes, and many others—directly employ 5 million Americans. In fact, subsidiary income is four times greater than annual two-way trade. Trade disruptions caused by tariffs would impact a larger share of US production than mere trade figures demonstrate, as reduced investments in the United States would mean less money for local taxes and lower employment for local suppliers and businesses in their communities.

Supply chains would also be severely hit. Beyond the importance of European subsidiaries, more than 50% of transatlantic trade is intracompany. US and EU supply chains are intertwined, with intermediate goods traveling into the United States for finishing and distribution. While retailers warned that tariffs on China would show up in higher consumer prices and bare shelves, tariffs on transatlantic trade will show up in production stoppages and layoffs. Goods for the US market will be impacted by the tariffs, and goods destined for other markets will face huge competitive challenges if they must include higher costs.

The very jobs the president is fighting for—manufacturing jobs—are on the line if the United States retains 30% tariffs and Europe adopts targeted retaliatory measures, escalating the trade war. The EU, its member states, and individual firms must aggressively engage with US federal, state, and local lawmakers to explain the extent to which tariffs are going to affect American jobs and potential future European investment. British Ambassador Peter Mandelson’s recent campaign to remove the “revenge tax” from US legislation shows pro-Europe, pro-investment persuasion can work. European leaders need an all-hands-on-deck effort from industry, diplomats, and others to get American officials—members of Congress, governors, and local leaders—to speak up about the impact of tariffs on their voters and their livelihoods.

The EU should take a balanced approach of protecting its interests while publicizing the downside for the United States. Brussels should aim to secure a good deal by advocating for itself calmly but confidently.