Aparna Ravi
This article forms part of our series on perspectives from across UCL and beyond on the changing geopolitical order, and the implications for Europe, the European Union and the EU-UK relationship. Find more articles here.
The second Trump administration has sent shockwaves through the global economy as countries brace for disruptions in production, supply chain shortages, and increased consumer prices. On his first day of office, Trump announced 25% tariffs on Mexico and Canada, subsequently threatened tariffs on Colombia, increased existing tariffs on Chinese imports, and imposed a wave of new tariffs on aluminium and steel for all trading partners. Trump then announced that starting from April onward, the U.S. would put in place a reciprocal tariff system, where tariff rates would be calculated based on the existing levels of trade partner tariffs.
Fairness in the global trading system
The package of tariffs unleashed by the Trump administration has aimed to target the U.S. trade deficit, which Trump believes stems from the fact that many countries have higher tariffs on U.S. goods than the U.S. has on foreign goods. The reciprocal tariff system aims to address this perceived injustice by calculating country-specific tariff rates based on countries’ existing tariff levels on U.S. products.
However, we already have an institution for levelling the playing field for global trade – the World Trade Organisation. Comprised of 166 members, one of the core tenets of this multilateral trading system is the most-favoured-nation (MFN) principle, which means that tariffs imposed on one trading partner would need to be applied to all trading partners. Countries thus “lock in” their tariff rates with all trading partners at WTO negotiations, avoiding the use of country-specific tariffs on thousands of individual products.
The multilateral system governing global trade sought to avoid precisely such forms of economic warfare. So why has the WTO been silent on this wave of protectionism? Because the organisation’s appellate body, responsible for evaluating evidence around the tariffs and issuing judgements to the offending countries, has been immobilised as the result of the U.S. government blocking new appointments to the panel since 2017. The resulting paralysis of the multilateral body governing global trade means that countries are forced to come up with individual solutions to dealing with what amounts to an all-out trade war.
What would the tariffs mean for the U.K and the E.U.?
There is no doubt that the proposed tariffs would have a monumental impact on the economy of the E.U., U.K. and the rest of the world. While the aim is to solve the trade deficit, tariffs are often met with retaliatory tariffs which simply reduce the volume of both imports and exports thus leaving the overall deficit unchanged. Tariffs on raw materials, such as aluminium and steel can drive up the costs of production and raise consumer prices for multiple industries including defence, automobile manufacturing, and consumer electronics. Trump has also threatened tariffs of over 200% on European wine and alcoholic beverages, which would be catastrophic for an industry that depends heavily on exports to the US.
Beyond tariffs, however, the program could be used to change various domestic policies in the E.U. and U.K. The E.U. is actually in an interesting position in that its overall tariff rates tend to be lower than the United States’, so the U.S. tariffs will likely be used to target issues of internal regulation. The Trump administration has long-standing issues with other aspects of European regulation, from the value-added tax to data privacy regulation, food and safety standards or digital services taxes. These issues, usually referred to as “non-tariff barriers”, have allegedly made it harder for American companies to do business in Europe. Furthermore, the E.U. has recently enacted climate and labour-related supply chain legislation, which could impose penalties for American firms operating in the E.U. who fail to comply with the rules. The new tariff program will thus likely hone in on various aspects of internal regulation, demanding policy concessions in exchange for market access to the U.S.
What’s next for global trade?
There are two main ways that the U.K. and EU could respond to the threat of tariffs. The first would be to respond to Trump’s pressure, either through capitulating to the tariff demands or by responding with retaliatory measures. On this point, the U.K and the E.U. may differ in their approach to the U.S. For example, the European Commission has accused Big Tech companies like Apple, Google, and Meta of breaking EU digital competition rules, and, if these companies face penalties, this will likely result in harsher tariffs on the E.U. from the Trump administration. The E.U. is also considering using its Anti-Coercion Instrument – which could allow a range of tools from restricting foreign direct investment to revoking intellectual property rights of U.S firms – to respond to the tariff threat. On the other hand, the U.K. has adopted a more conciliatory tone, and is currently in discussions to lower their digital services tax on U.S. tech companies in order to avoid higher tariffs.
Global players may also respond to U.S. protectionism by engaging further with one another. The Trump tariffs take place amidst a deepening trade war between the U.S. and China, and the U.K. and E.U. may seek to adopt a mediating or bridging role between the two. On electric vehicles, for example, while the U.S. has effectively blocked Chinese EVs from the market through 100% tariffs, the EU has capped its tariffs on Chinese EVs at 35%. The E.U. may wish to rethink its approach towards economic decoupling from China to avoid fighting a two-front trade war. Beyond China, the E.U. can also aim to finalise its trade deals with Mercosur countries and India to diversify its export markets and reduce its dependence on the U.S. market.
The Trump administration’s tariff plan has signalled a definitive break from the rules-based trading system. As the U.S. becomes increasingly isolationist and cut off from international trade, while posing significant risks, both the E.U. and U.K. may also find the new reality provides opportunities to broaden their economic engagement with the rest of the world.
Dr Aparna Ravi is a Lecturer (Teaching) at UCL. Prior to joining, she earned her PhD from the George Washington University in 2021. Her dissertation, entitled ‘Rising Multinationals: The Political Economy of Outward Investment from the Global South’, investigates the impact of emerging-market multinationals on national economic development trajectories. Prior to my doctoral studies, she received a BA in International Studies from Emory University and an MA in International Relations from the University of Chicago.
Note: The views expressed in this post are those of the author, and not of the UCL European Institute, nor of UCL.
Featured Image: Picture taken by Galen Crout via Unsplash
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