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If Trump shoots himself in the foot, the EU doesn't have to
THE first salvo in the transatlantic trade war has now been fired by the United States, which is imposing stinging tariffs on steel imports from the European Union (as well as from Canada and Mexico). It was an unprovoked attack, to which the EU has vowed to retaliate. Moreover, US President Donald Trump has announced an investigation into whether car imports threaten national security. Any tit-for-tat response could thus quickly escalate from steel to the automotive industry, which is vital for Europe.
Unfortunately, it seems that emotions and short-term political posturing, rather than economic logic, are dictating the EU's reaction. For starters, there is a key inconsistency in the discourse of the EU (and other US trading partners).
The EU argues that tariffs on steel imports mainly hurt the US itself, and most economists would agree. But this also implies that counter-measures taken by the EU will mainly hurt Europe.
Because the selective tariffs threatened by the Commission will affect finished products, not inputs like steel, the damage inflicted on EU consumers by European countermeasures will be smaller than the damage inflicted on the US economy by Mr Trump's steel tariffs.
Increasing tariffs remains an act of self-harm. Economists are fond of observing that the argument for counter-measures against protectionism abroad is like saying: "If you shoot yourself in the foot, I will do the same."
The proper response to Mr Trump's claiming that a larger US steel industry is in the national interest should be: "Mr President, if you insist that national security requires your country's industry to receive lower volumes of high-quality European steel, we can help. We will organise a cartel of our producers and ask them to increase the price they charge to US consumers."
Technically, this would amount to the EU agreeing to what is euphemistically called a "voluntary export restraint" (VER). From a strictly economic point of view, this represents an attractive alternative to tariffs for the exporting country.
With the import tariffs on steel just announced, the US will at least obtain some revenue. For steel, the sums involved would be moderate. For example, a generalised import tariff of 25 per cent on steel products could yield almost US$4 billion per year, even if imports were to fall by almost half (to US$16 billion). This is negligible relative to the US fiscal deficit, which might near US$1 trillion this year.
But if the EU had agreed on a VER, European producers would have received that US$4 billion from higher sales revenues, and for them this sum would have been a very important shot in the arm, allowing them to invest in higher productivity and more sustainable production.
In other words, to the extent that Mr Trump just wants allies to reduce their exports to the US, this can be accommodated by EU producers increasing prices and pocketing the higher revenues - never mind that US consumers of steel would thereby be subsidising foreign steel producers.
Instead of blustering and showing off long lists of products on which the EU will now impose tariffs, European leaders should signal to the US that they are willing to organise a VER for their steel producers. This is the approach successfully pursued by Korea, whose steel producers do not face a tariff, because they are reducing their exports by charging higher prices and can thus expect much higher profits.
The fact that a VER could also satisfy US demand also means that the conventional wisdom underlying trade negotiations does not apply in this case. That wisdom, supported by the "game theoretic" models beloved by economists, suggests that retaliation is indeed the best strategy.
But this is true only in a "normal" negotiation where both partners use the threat of tariffs as their main bargaining tool. When one partner (the US) offers to eliminate its tariff in exchange for export restraint, the game is over: this is an offer that is too good to refuse.
The EU has just rejected such an offer, partly owing to a sentiment of wounded pride, but also because EU competition rules might make it difficult to organise a cartel of European steel producers. Moreover, the EU has long fought in the World Trade Organization to make VERs illegal. But these legal and diplomatic niceties can and should be overcome to arrive at a solution that makes economic sense for the EU.
Steel is the issue today; who knows what other sectors will follow. Instead of engaging in a costly strategy of escalation, Europe's leaders should swallow their pride and humour Mr Trump when he insists on running the US economy into the ground. PROJECT SYNDICATE
- The writer is director of the Center for European Policy Studies