The tariffs announced by US President Donald Trump on goods imported from China, Canada and Mexico (even if those on Canadian and Mexican goods have been paused) will lead one to think that tariffs will also be imposed on goods imported from the EU into the US. These are just the initial skirmishes which suggest that we will soon be facing an all-out trade war.

One needs to appreciate that the US has every right to set its own economic policy in the way it thinks best. The US is the largest goods importer in the world – buying products worth $3 trillion and the largest trade in goods deficit, which is of around $1 trillion. The incoming US president has long complained about the deficit, as he sees it as a weakness in the US economy and an unfair trade practice.

However, there should be no doubt about two things. First, an all-out trade war will cause further fracturing in our global economy, as I had mentioned in my contribution two weeks ago. This is likely to hurt everyone, including small countries like ours. Second, the EU needs to look after itself, without losing its distinct characteristics.

French President Emmanuel Macron has said that the EU “will stand for itself” if tariffs are imposed on its exports to the US.

The EU economy (that is, incorporating the 27 member states) is the third largest economy in the world. The US leads the way with a nominal gross domestic product of around $30 trillion. It is followed by China with around $20 trillion and by the EU, also with $20 trillion. 

An all-out trade war… will likely hurt everyone, including small countries like ours

China has a share of the world trade of 18%, the EU has a share of 14% and the US has a share of 10%. One of the distinct characteristics is that distribution of income within the EU is more equal than it is in the US and China.

The two EU member states which are the largest exporters to the US in absolute terms are Germany and Italy. In relative terms, the EU member state which relies most heavily on exports to the US is Ireland.

The main consequences of a trade war are likely to be higher inflation and slower economic growth. Tariffs would increase prices and consumers would have to pay the price. Slower economic growth may give rise to higher unemployment and may also cause a downward pressure on real wages.

In both instances, consumers will again have to pay the price. The cost of government borrowing may remain high, as data on long-term bond yields are showing. Yet again, the consumers will suffer the most.

The answer to the imposition of trade tariffs by the EU may not necessarily be a tit-for-tat approach. The EU is facing a shift to the right in its political outlook. However, this shift to the right may be nothing more than anger at the fact that the general public has to foot the bill of any economic crisis. 

The EU does need to look after itself if there is a trade war, but maybe the way to do that is by ensuring that consumers and workers are not forced to pay the price for such a trade war.

Using a hackneyed phrase, our European statesmen need to see this as an opportunity and not a threat.