Europe’s Green Deal Could Open a New Front in the Trade War

In mid-January, U.S. President Donald Trump is slated to sign a so-called phase one trade deal with China, which may put the U.S.-Chinese trade war on the back burner for the coming year. But that doesn’t mean the United States’ trade disputes are over. In fact, all signs now point to a trans-Atlantic trade war taking center stage in 2020.

Over the coming year, the Trump administration will likely ratchet up tariffs on a variety of European goods. And the European Union will retaliate in kind. Such tit-for-tat skirmishing risks spiraling out of control as Brussels gets serious about limiting climate change while Washington continues to pull back from its international commitments to contain carbon emissions.

In an election year, the incumbent Trump needs a foreign foil. China has proved too risky an adversary, as his tariffs on Chinese imports imperil U.S. economic growth. Enter a new boogeyman: Europe. Alleged European trade unfairness—coupled with the continent’s efforts to curb global warming—provide Trump with a rhetorical witches’ brew tailor-made to appeal to his electoral base: foreigners and their elite concerns threatening to victimize his supporters.

Trump has long complained about European trade unfairness, particularly the $169 billion annual merchandise trade deficit the United States runs with the European Union. He has already taken or threatened action to reverse it; obsessed with the fact that European automakers export over six times as many cars by value to the United States as U.S. automakers export to Europe, the president has threatened for the last two years to impose duties on European vehicles, dubiously justifying the threat on national security grounds. While the administration recently let the deadline for such action pass, he could always change his mind. And not all of his threats where rhetorical posturing. In 2018, the administration imposed tariffs on European steel and aluminum as part of its confrontation with China.

Now Washington is reportedly mulling boosting tariffs on European products to pressure Brussels to further curb its subsidies to the European aircraft-maker Airbus. The administration is likewise considering new duties on French goods in retaliation against a French tax on the earnings of U.S. digital companies such as Amazon and Facebook. And by recently sabotaging the dispute settlement mechanism at the World Trade Organization, the White House has insured that there is no peaceful way to resolve these disputes.

Not to be bullied, Phil Hogan, the recently appointed EU trade commissioner, has talked of using Europe’s own might—through yet-to-be-crafted trade weapons—as a means of getting “Mr. Trump to see the error of his ways.”

This is how trade differences escalate into trade wars.

And a new battlefront is about to open. The new European Commission has promised to put forward a draft European climate law by March in an effort to decarbonize the EU economy by 2050. Any such laws would have confrontation with the Trump administration written all over them.

After all, in a not-too-subtle reference to the Trump administration’s plans to formally withdraw from the Paris climate accord in 2020, the commission’s recent paper on a European Green Deal noted that “as long as many international partners do not share the same ambition as the EU, there is a risk of carbon leakage, either because production is transferred from the EU to other countries with lower ambition for emission reduction, or because EU products are replaced by more carbon-intensive imports. … Should differences in levels of ambition worldwide persist … the Commission will propose a carbon border adjustment mechanism, for selected sectors, to reduce the risk of carbon leakage. This would ensure that the price of imports reflect more accurately their carbon content.”

The EU may put up a carbon border tax, which would hit U.S. exports of coal, natural gas, steel, and many manufactured products hard.

In other words, the EU would put up a carbon border tax, which would hit U.S. exports of coal, natural gas, steel, and many manufactured products hard. A Trump administration committed to boosting such U.S. exports is unlikely to turn the other cheek.

There will likely be other elements in any decarbonization law that run afoul of Trump, too. In its paper, the commission also proposed promoting “new forms of collaboration with industry and investments in strategic value chains,” raising competition policy and subsidy issues that will not go unnoticed in Washington. And flying in the face of Trump administration efforts to curtail improvements in fuel efficiency and emissions standards, the commission has hinted that it will also propose more stringent standards for combustion-engine vehicles, making it even harder for U.S. automakers to export to Europe. It will also surely pursue stricter agricultural policy around sustainable practices, which will put a damper on imports of U.S. foodstuffs.

The European Union and the United States are each other’s largest export markets. A trans-Atlantic trade war, whether launched over protectionist grievances or in the pursuit of slowing climate change, would prove devastating to both economies.

Politicians on neither side can be trusted to avoid this eventuality. Trump’s electoral imperatives and his long-standing antipathy toward Europe effectively rule out any de-escalation led by his administration. And unprecedented European public dislike of Trump and widespread concern about climate change mean that European leaders will pay a stiff political price if they fail to stand up to the United States.

So it is up to the U.S. Congress, the Chamber of Commerce, and their European counterparts to stage a preemptive intervention. There should be early hearings in Brussels and on Capitol Hill to sound the alarm about the coming trade troubles and to explore legislative avenues to block a trade war. The trans-Atlantic business community must lean on politicians—perhaps by threating to withhold campaign contributions in the United States—to convince Trump and his peers that diplomacy, not confrontation, is the prudent approach to resolving trade and climate differences, while preserving the fraying trans-Atlantic relationship.

Having achieved a trade truce with China, the Trump administration now risks confrontation with Europe. Without an early and forceful intervention, 2020 could well prove to be another year of living dangerously.