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Earlier this month, Donald Trump announced (via social media, of course) that the European Union (EU) had an nonreciprocal relationship with the U.S. and that he was, in consequence, going to impose 30 percent tariffs on the bloc come August 1. Imperious as always, he continued that, should the Europeans respond in kind, he would simply ratchet up the tariffs still further. He issued similar threats against Canada and Mexico, and also threatened Brazil with 50 percent tariffs out of pique that his political ally Jair Bolsonaro is being prosecuted for efforts to violently overturn his 2022 election loss.
In normal times, two things would have immediately followed this: First, the U.S. markets would have taken a swan dive, as would major markets around the world, as investors calculated the likely impact of huge price hikes imposed on imports from some of the United States’ most important trading partners. As recently as April, that’s exactly what happened when Trump first declared his tariff-raising “liberation day.” Indeed, the fragility of the bond market in April seems to have convinced Trump to back off from immediately implementing his more extreme tariff threats.
Second, EU leaders — as well as those in Canada, Mexico, and Brazil — would have bristled mightily, and publicly, at Trump’s peremptory, imperialistic tone, at his language implying that he was dealing with miscreant vassal states rather than with peer nations, and his assertion of the right to simply rip up months of painstaking trade negotiations via middle-of-the-night Truth Social tirades.
But, in the immediate aftermath, neither of these happened. Brazil’s president, Luiz Inácio Lula da Silva, did admonish Trump for his presumptuousness in intervening in domestic Brazilian affairs, but most other leaders backed off from a public fight. Markets have, over the past three months, gotten largely inured to Trump’s tariff threats, viewing them more as tantrums associated with the U.S. president blowing off steam than as true statements of political intent. Indeed, the phrase TACO tariffs (“Trump Always Chickens Out” tariffs) has come to define these political spasms. As a result, in the immediate aftermath of Trump’s miserable threats against the EU, stock indices hardly moved. Translation: The markets are pretty sure that Trump is bluffing and that, if his bluff is called, he will, yet again, back down. They are, in other words, betting the house that behind the language of strength lies a very weak-willed man.
As for Europe’s political leaders, they have grown so inured to Trump’s endless narcissism, tacky showmanship, and insults that almost all of them declined to issue public responses. Those who did respond — notably French President Emmanuel Macron and European Commission President Ursula von der Leyen — offered only brief and muted criticisms and then proceeded with their real business of shoring up alternative military and trading alliances that, increasingly, are bypassing an unreliable and unstable U.S. government.
Even while they accept Trump’s demands that they ratchet up military spending, in recent months, the major European powers have been signing mutual defense pacts that will stay in place if Trump blows up NATO. Germany, France, and the U.K. are now firmly committed to these pacts, as are many of the lesser military powers in Europe.
They have also been negotiating trade agreements with numerous other global partners. Britain is, after nine years in the wilderness following the Brexit vote, drawing closer economically to the EU once again, and has negotiated a sprawling free trade deal with India; Canada is becoming something of an extra party to the EU; and many other countries around the world are forming trade partnerships likely to include the EU but exclude the U.S. In other words, Trump’s “America First” rhetoric isn’t making the U.S. more dominant — rather, it’s leading to the creation of trade alliances that over the coming decades will channel products away from U.S. markets and toward other countries and regions. In this context, Trump’s ferocious language is being greeted with something of a collective yawn.
There is, however, a possibility that Trump’s bluster could at some point reach a point of no return. If he issues one tariff threat too many or implements some of these threats and mightily spooks the markets, he could set off a series of secondary political and economic reactions that cumulatively, could do enormous damage both to U.S. standing in the world and to its long-term economic stability — and doing so could ultimately draw Europe into retaliatory actions that create a lose-lose situation.
“This has a very disagreeable smell of the [1920s] and ’30s, both in economics and politics,” says Andrew Graham, political economist and former master of Balliol College, Oxford (and, for full disclosure, one of my economics tutors when I was an undergraduate at Balliol in the early 1990s). “The EU is, quite rightly, talking about retaliation but holding off as long as possible. If everyone retaliates, everyone loses.”
Yet, there may ultimately be enough political pressures — from angered government ministers, from corporate leaders whose firms are being hammered by U.S. tariffs, and by electorates infuriated by the way Trump is treating U.S. allies — to retaliate that Europe’s leaders won’t be able to hold off in their response should punitive tariffs kick in next month. Already, voices in Europe are talking about slapping reciprocal tariffs on U.S. aircrafts and parts, on cars, on electrical goods, and on digital services, among other products. Alan Beattie, senior trade writer at the Financial Times, told Truthout he thinks Europe hasn’t quite worked out how — or even whether — to fully respond, but that there’s a risk the response won’t be coordinated enough to be able to effectively counter Trump’s bullying.
“The EU could have chosen to say ‘more fool you’ and ignore Trump’s tariffs; it could have chosen to negotiate a mitigating deal like the U.K. has; it could have chosen to retaliate with all means at its disposal. Instead it’s flailed about, veering between the three options,” Beattie argued. “Divisions between the EU member states and the continued obsession with the German car industry have shown the EU isn’t really prepared for the new world of Trumpian trade.”
If, come August, an American-European tariff war really does kick off in earnest, the consequences could be hugely damaging.
Graham worries that, for years, both economic powerhouses would then be stuck in a stagflationary limbo, with companies not believing the tariffs will stick in the long run and thus not making the huge investments necessary to truly disentangle the two economies and set up alternative supply chains. In such a scenario, existing relationships would limp along, but with much lower overall levels of trade between the two blocs, less political goodwill, and with higher prices for basic goods and services on both sides of the Atlantic.
Graham said he is most concerned, however, about the psychological impact of Trump’s continuous barrage of tariff threats. At some point, he says, institutional investors will simply lose confidence in the United States’ reliability, and that loss of confidence will, in turn, generate very specific economic consequences. Other senior economists, including analysts at JPMorgan Chase, have recently articulated similar concerns.
For decades, investors have been willing to loan the U.S. government vast sums of cash at very low interest rates. If those investors, and countries, lose confidence in the United States’ reliability and in its ironclad commitment to repay its debts, they will draw down their investments in U.S. debt — making it harder for the U.S. to sell treasury notes, forcing the U.S. to pay higher interest to fund its debt binge, and putting strong downward pressures on the value of the dollar.
That’s a crisis that could unfold extraordinarily quickly — and ultimately, Graham says, it’s one that could result in the dethroning of the dollar as the global reserve currency. Since no other currency is ready to step in to fill the void, a weakened dollar would result in escalating economic uncertainty and increasingly significant gyrations in prices for assets, such as oil, that are priced in dollars.
“This is the 1930s,” Graham says of this scenario. “Bad news for everybody.”
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