Europe’s two-front trade war

AS THE US and China wage trade wars against it, the European Union (EU) finds itself on uncharted terrain. It must now devise battle plans that account for the vast differences – and important similarities – between the two confrontations.

The trade war with the US came as something of a shock, though it should not have, given President Donald Trump’s open hostility towards the EU and fundamental misunderstanding of trade dynamics. Trump complains about America’s trade deficit with the EU, but that deficit extends only to goods; in services, the US runs a surplus with Europe. And Trump’s tariffs amount to shooting the US economy in the foot while doing nothing to reduce current-account imbalances, which primarily reflect America’s low savings rate.

This is not just a trade matter, but a political one. The Trump administration is seeking to intimidate – and extract concessions from – Europe, even at the risk of endangering US growth. Trump is probably convinced that the Europeans will cave in, allowing him to boast domestically about an easy “victory”.