What should Europe do now?

 

Fred Guerdin / European Union, 2025 / EC - Audiovisual Service

It was galling to watch the spectacle, last month, of European Commissioner, Ursula Von Der Leyen sitting beside Donald Trump at his gaff in Scotland – the Turnberry golf course.  It was  a case of:

‘You come to my place and beg and by the way don’t forget to say a big thank you to  Daddy’ (as Mark Rutter might have added).

In the inevitable whirlwind of breaking news the episode has been left behind.  Later, on the 21^st of this month a statement was made that an ‘agreement’ had been reached securing a maximum 15% tariff on EU goods exports to the US including a key sector of interest to Ireland – pharmaceuticals.  The four-page ‘agreement’ is referred to as a ‘Framework Agreement on Reciprocal, Fair, and Balanced Trade’.  It is anything but.  The European Union agreed to a number of provisions including the following:

• Removal of all tariff barriers to US industrial products as well as to grant preferential treatment to a range of US agricultural and seafood products.
• Acceptance of a 15% tariff on most EU products including pharma and cars entering the US. This rate includes a 10% rate already applied last April.
• From 1 September the US will apply either its standard Most Favored Nation (MFN) rate or a flat 15%—whichever is higher.
• A commitment that an additional $750 billion is invested in US liquified natural gas, oil, and nuclear energy products up to 2028.
• A promise that an additional $600 billion is invested in US infrastructure including military supplies up to 2028.
• For what it is worth a vague undertaking to work for ‘strong protection of internationally recognised labour rights, including with regard to the elimination of forced labour in supply chains’.
• An open-ended and non-specific commitment to work with the US to reduce or eliminate ‘non-tariff barriers’. These cover product standards including food an area of long standing concern to consumer, farming and environmental interests in Europe.
• A zero for zero carve out for aircraft and aircraft parts and a commitment to explore a possible zero-for-zero carve out for alcoholic spirits and some medical devices.

In return for all of the above the US agreed to what? Zero tariffs on most US products into the EU and nothing by way of a firm or specific security guarantee. Well, it could have been worse?  After all, the Swiss were subjected to an across the board tariff of 39%. We will never know but one thing is sure – Europe has lost face.

EU has ceded ground that it will not easily reclaim

The concession by the EU of no tariffs on the US in exchange for a 15% tariff on most EU goods arriving in the US is a huge one and signals a relatively weak and, at times, politically divided Europe.  It resets the balance in a way that makes it much harder for the EU to negotiate back towards ‘zero for zero’ in the future.  The default is now very much in the favour of the US not to mention in the area of services which are largely outside the scope of the statement.

All of this follows months of torturous negotiations and what looked like a failure to reach agreement as recently as late July. At that point, the EU was ready to conduct a mutually destructive trade war with the US using a barrage of retaliatory measures. The statement of 21 August is not a formal treaty, though. It is an agreement – for now – and could be rescinded at any stage by either side. Arguably, what Trump has done so far has greatly exceeded his legal powers under US law. But, what does that matter now as the US slides daily towards an ever more authoritarian model of federal governance. The European Commission does have discretion on tariffs but details of the agreement could require political buy-in and cooperation from all Member States.

It may be claimed that the agreement was the best bad deal possible in the circumstances. It may also be claimed that the hands of the EU were tied by larger geo-political realities not least the war in Ukraine and the fragile state of a security backstop for Europe in the case of Russian aggression. Unlike say China, the EU did not have the capacity, unity of will and fire power in terms of something such as rare earth minerals with which to threaten the US.  Ireland continues to be extremely vulnerable due to our over-reliance on US trade and inward investment. In fact, its degree of trade and investment exposure to the US exceeds by far that of any other member of the European Union.

Certainty?

Domestic commentary including statements by the Government, here, have claimed that the ‘agreement’ gives ‘certainty’ to Irish business. But, does it?  It could have been a lot worse for sure.  And, 15% looks palatable compared to a hypothetical 20, 30 or 40%.  Various percentages were bandied about over months of talking. However, the devil is going to be in the detail.  Some of the provisions in the Statement of 21 August seem to be more aspirational and vague including the commitment that EU businesses will invest $750 billion in US infrastructure plus $600 billion in US energy. How will this be enforced? The commitments are non-binding and based largely on private sector goals which the EU cannot effectively enforce. Moreover, if POTUS Trump is not in good form some day he can threaten to tear up the agreement as he has on previous agreements and he has already threatened a 35% tariff if the EU does not deliver on the investment commitments within days of the Turnberry handshake deal.

European exports with some exceptions will be subject to a 15% tax payable by US consumer (and producers buying intermediate goods from the EU) while US goods have unimpeded zero-tariff access to European markets.  To add insult to economic injury, Europe was compelled to buy €750 billion of liquid petroleum gas from  the US along with a similar €600 billion in armaments. Not great for the environment and not great for spending on education, health and other social goods.  Security and defence are now transactional and not based on norms and laws of international law, free competition and shared political values.

Rewarding the bully

We have been treated to the spectre of a humiliating defeat for Europe on terms and conditions that reward the bully. ‘Do this or I will punish you with much higher tariffs that would stop trade almost altogether’ is the tactic.  The danger is that having made such an enormous political concession Trump might be inclined to tear it up on a whim to do with some aspect of EU Member State positioning on Palestine, Digital Sales Tax (see below) or what he claims to be un-American policies. The very institution that dates from the European Coal and Steel Community ECSC set up in the ashes of World War II has been described by President Trump in the following terms:

“Let’s be honest—the European Union was formed in order to screw the United States. That’s the purpose of it, and they’ve done a good job of it. But now I’m president.” (see Sky News)

The European Union evolved from the EEC and, ultimately, the ECSC set up in 1951 as a bulwark against future European wars and against the formidable rise of communism in the wake of the defeat of Nazism.  The attitudes and claims behind Trumpism is not just bad mercantilist economics but a complete re-writing of history and inversion of world politics.  Where Trump and his ilk have a partial point is in relation to re-shoring and booking of profits by US multinationals in Ireland. But, the answer to that is not economic chaos but international cooperation.

Measuring the impact

The economic impact of the tariffs in Ireland are difficult to gauge. There are many moving parts to the story including cost inflation over and above tariffs, depreciation in the value of the US dollar (which is bad for EU exports) as well as the specifics of particular market products and sectors. It is likely to be a case of lower than previously projected growth in jobs, income and revenue rather than no growth or even recession.   Pharma is big news in Ireland because of the sheer extent of export value and volume as well as profit-shifting to Ireland by some of the big names. However, agri-food, alcohol and other sectors are highly vulnerable especially where products are said to be relatively price elastic (consumers are more likely to switch to US products if EU export prices are hiked). Two major risks include  the impact on (i) investment in the future where the big Tech giants and Pharma consider future expansion plans and (ii) corporate tax revenues with very significant implications for budgetary plans this year and in the coming years.  The ESRI and the Department of Finance pencilled in a projection or working assumption of slower job growth as a result of the April 10% tariff (see The impact of deglobalisation and protectionism on a small open economy - The case of Ireland). What we got, so far, is 50% worse than that scenario.

And what about the North?

Moreover, there is now a gap of 5 percentage points on exports to the US from Northern Ireland and the UK compared to exports from the Republic of Ireland. This is not trivial especially if product standards were to diverge.  This aspect of the bilateral trade deals has not received as much attention as it should.  How will US authorities police and investigate country of origin patterns on intermediary products and ingredients shipped across the Irish border numerous times before the product gets shipped to the US? Lack of clarity on this goes to how badly though out these arrangements are and how rushed the negotiation talks were given the unrealistic deadline set by the bully-negotiator.

It should be pointed out that most of exports from Ireland to the US are in the form of services which are not included in Trump’s tariff plans at least for now.  Ireland exports are twice as much to the US by way of services (which includes software, royalties and financial services) as it does by goods. Companies like Google, Meta and Apple route payments linked to Intellectual Property through Ireland to avoid paying tax in the US or elsewhere. Ireland is also a global hub for cloud services.

And what is wrong with that one may ask? Sure it pays for public sector pensions (like mine), hospitals, teachers, capital infrastructure and so on. There are two reasons why it is not OK;

It represents a distortion of trade and a mis-direction of money to wealthy countries and away from developing countries in the Global South.

It is a highly skewed and unreliable source of Government revenue for the Irish exchequer as we have been aware all along but have not been addressing (the Irish Government fought the European Commission about paying back huge sums of money owed by Apple on foot of its tax-avoiding schemes in Ireland).

Taking on the Big Techs

No wonder Ireland opposes the 3% Digital Sales Tax (DST) proposal of the European Union. This is a tax on revenues created by online services including advertising.  Companies may have a limited physical presence here but book huge amounts of revenue in Ireland. Watch this space as the matter is still the subject of negotiation and positioning by the EU and US with the OECD trying to act as a broker in terms of its proposal to distribute taxing rights according to where the Big Tech draw revenue from sales. In the meantime, the EU is seeking to standardise such taxes across the EU – a proposal to which Ireland is vehemently opposed.

Here is what Trump said recently:

“Digital Taxes, Digital Services Legislation, and Digital Markets Regulations are all designed to harm, or discriminate against, American Technology… This must end.”

In a Reuters story, Trump is even threatening individual EU States and officials responsible for DST. You better watch out this side of Christmas.

Trump is taking advantage of weakness and division on the European side to drive a completely imbalanced deal.  He is also openly interfering the internal affairs of European democracies including Ireland (refer to the Saint Patrick’s Day charade at the White House) using tariffs and money as weapons.

What we need to wake up to is that trade is more than ever part of a geo-political game. It is as much to do with domestic US politics, the military-industrial complex, the Big Tech Brothers and the flux of who is in and who is out at any given moment.  Brazil is out (even though they run a trade surplus with the US) because of Trump’s annoyance over how his friend, Bolsonaro, is being dealt with there.  Canada is also out for a number of reasons including their support for a Palestinian State (Trump mentioned this). And the UK including Northern Ireland is in for now.

The case of the nice Canadians

Canada signalled that it would recognise the State of Palestine at the end of July.  Within 24 hours the headline tariff rate on Canadian goods that were not exempt went from 25 to 35%. Fentanyl trafficking and the Palestinian recognition were given as reasons.  Canada exemplifies the point that any existing agreement is as good as it lasts while Trump rides roughshod over previous deals such as the US-Mexico-Canada Agreements of 2018. Though not formally revoked, the previous deal is breached and mechanisms under that Agreement have been misused while trust has been undermined. Again, talk of Canada becoming a 51^st State earlier on was a type of softening up bullying tactic.

There are, at least, two crucial factors to bear in mind

1. Trump could change his mind on anything at any time as it suits
2. There is no ‘deal’ strictly speaking until everything is agreed and this is certainly not the case with the US-EU ‘deal’. 

Where this could all go wrong for Trump is the extent to which he is driving Europe into the hands of other dealers such as China as well as Asiatic and South America markets. A particularly concerning aspect of the Turnberry ‘deal’ is that we do not know how this will play out in regards to what are termed non-tariff barriers (NTBs) which encompass regulation of food standards. For now, all talk of a digital sales tax on Big Tech is off the table.  Even the Canadians caved in on that in June as a major pre-deal concession. The US rewarded them by raising the planned tariff rate. Make concessions to the bully and he will come back looking for more as history has taught us again and again. We may also note that a European Digital Sales Tax could flounder on the rocks of US threats and clawbacks next year as the US heads into mid-term elections – if these are not cancelled in the wake of an engineered and so-called ‘national emergency’ (no kidding).

Events are unfolding at such a speed and so much confusion surrounds the finer details of any settlement that it hard to know what to expect, when and how. 

Solidarity with ordinary Americans

Lest critics of the antics by Trump and his administration be portrayed as anti-Amercan let it be said that most ordinary American people will be adversely impacted by the politics of Trump ranging from higher inflation, growing income inequality and withdrawal of medicare.  It is all part of a strategy to enrich the rich and impoverish the poor and blame immigrants, domestic opponents and other countries for what is wrong. It is vital for Ireland and Europe to work with Americans. Europe should offer refuge to US scientists and researchers. European political movements should reach out to their counter-parts in the US to educate, organise and mobilise world opinion in defence of democracy, the rule of international law and the protection of the weakest. We are 450 million, they are 345 million. And, at least half of the latter are deeply unhappy with Trumpism while over 95% stand to lose out in the longrun.  We should aim to flex our European muscles.

And where now?

By selling the Turnberry deal as the only game in town and better than a hypothetical alternative the Irish Government parties risk undoing some of their pre-budget strategy of talking down economic fortunes to dampen voter expectations. Elections are far off but then the impacts of global shocks will be gradual and long-lasting.

Where do we go from here?  I suggest that the European Union work with other democracies including Canada to begin the construction of a new World Trade system.  We will have to do business with China but not on their terms only but as bilateral trading partners. China played hard ball with the US threatening on rare earth minerals and up to now this has worked as Trump backed off and is delaying. The EU does not have the same cards to play and is, in any case, relatively weak and divided.  Yet, it can and must claim the higher moral ground vacated by the US which has joined the panoply of rogue States intent on world domination and prepared to use any and all manner of means to bully their way economically and politically.

The European Union needs to get its act together before the rising tide of far right politics seizes power in more EU States.

We the people of Europe must press our governments to:

1. Realign and form strategic alliances on the global stage respecting human rights and the principles of democracy and rule of law.
2. Reinvest and take the lead on environmental investment and protection where the ground has been slipping.

And, here in Ireland we need to get to grips with the infrastructure crisis that is driving an inter-generational housing crisis as well as throwing petrol (or gasolin!) on the flames of racist and xenophobic politics. We need to ween ourselves off over-dependence on the US to a stronger domestic industrial and services sector and more diversified trade portfolio outside the US.

All of this will require unity and courage.  The time is slipping. Future generations will not thank us for our lack of action.

(next time I will consider some local issues arising from the tariff chaos here in the south east of Ireland).