Opinion & Analysis

Art of the deal: Four ways Europeans can find new trade partners in the Trump era

Trump’s trade policy is likely to harm European trade with America. Decision-makers can start to mitigate this now.

The trade policy of the second Trump presidency could make Europe poorer and kick off a new transatlantic trade war.

During his campaign, the president-elect repeatedly called for a 10 or 20 per cent tariff on all imported products. Such protectionist and inward-looking policies would massively hurt transatlantic trade and the European economy. The United States is the European Union’s largest export partner and accounted for 19.7 per cent of the bloc’s total export of goods in 2023. (China accounted for 8.8 per cent.) Tariffs of 10 per cent could cause GDP to shrink by 1.6 per cent in Germany and 0.80 per cent in France.

During Donald Trump’s second term, European firms may thus find the US a smaller, less profitable, and more difficult market to compete in.

EU leaders can explore numerous avenues to deal with such aggressive measures. One such avenue is to expand the trade Europeans do with other countries around the world. Of course, the entirety of US trade cannot be replaced by new markets – European exports in 2023 to South Korea, Mexico, Canada, Brazil, and India combined were roughly half of those to America. Yet Europeans can mitigate in advance for the economic damage by moving quickly to strike new trade deals with alternative markets.

EU decision-makers should take up four main actions in pursuit of this.

Complete the EU single market

The first place the EU should look is in the mirror – and recognise the huge, under-exploited opportunity of completing the single market. This is doubtless a daunting task, as it would require member states to surrender much of their remaining economic policy tools to the EU. It would also imply market consolidation for less competitive firms – sometimes those protected by national governments – as they find themselves pushed out of their markets and forced to shut down.  Nonetheless, the completion of the single market would bring big economic benefits – the EU is estimated to lose 10 per cent of its potential GDP due to remaining internal barriers – and would increase European resilience to economic challenges.

Accelerate free trade agreements already under negotiation

Beyond its own borders, the EU should drastically accelerate free trade agreements (FTAs) currently under negotiation or in the process of ratification. An FTA with the Latin American bloc Mercosur has recently encountered fresh obstacles after more than 25 years of negotiation. But the agreement is essential to European de-risking efforts, would boost European credibility and influence in Latin America, and could help secure access to raw materials the bloc lacks in its own territory.

Momentum has also picked up behind an FTA with India, but the two sides remain far apart: if a full agreement remains out of reach any time soon, the EU should offer to fast-track smaller sectoral deals to improve bilateral trade in the meantime. Meanwhile, in east Asia, the EU is negotiating a digital trade agreement with South Korea, an ambitious deal that offers the opportunity of expanding bilateral trade in a growing market for digital products. Trump has often lashed out at Seoul and US-South Korea trade relations present many dynamics that the new president particularly dislikes, including a massive trade deficit with the US. Reinforced ties with the EU would thus be attractive to Koreans wanting to find their own ways to weather the storm of Trump’s return.

Strongly prioritising the conclusion and implementation of FTAs would help Europeans secure easier access to export markets and compensate for protectionist measures coming from the US. Even more importantly, it would send a powerful political message that the EU is a credible and effective economic partner, and that Brussels remains committed to a multilateral and rules-based trade system. Member states should thus put aside remaining reservations and rapidly ratify deals that have been concluded, like planned agreements with Mercosur and Chile, which is a major source of lithium.

Do deals with Mexico and Canada

Besides those agreements, Europeans should also offer to expand and upgrade recent trade deals with Mexico and Canada – in order to retain indirect access to the US market. Even though Trump has promised a review of the United States-Canada-Mexico Agreement he himself negotiated during his first term, the two countries would likely maintain preferential access to the US. In this perspective, deepening the trade framework with them could provide European firms with an entry to the American market amid transatlantic friction.

Embrace emerging economies

Finally, the EU should move to quickly engage emerging economies, many of whose leaders are increasingly wary of China dumping cheap goods in their markets – a practice that hinders their own aspirations to develop domestic manufacturing.

This provides an opening for an EU searching for new trade partners. The bloc is already negotiating a trade agreement with Indonesia, a country that is set to reach almost 300 million inhabitants by 2030 – and that has announced hefty tariffs on Chinese products. There is much Europeans can offer. For example, European firms are world leaders in the production and export of industrial machinery, goods which are of particular interest to countries wishing to establish their own manufacturing and improve their downstream participation in value chains. In this regard, the EU should also make more strategic use of the Global Gateway, the bloc’s connectivity investment initiative, to improve economic ties with emerging economies. In FTA negotiations, Europeans should link trade liberalisation with the Global Gateway’s infrastructure investments to secure market access and support the establishment of new supply chains with emerging economies.

New exports in the developing world and improved ties with existing partners are no substitute for the American market. But they can help provide a cushion against the sweeping tariffs promised by Trump. At the same time, a wide and resilient network of trade agreements, coupled with the strategic use of available retaliatory tools, would put the EU in a better position to deal with the types of measures the next US administration is likely to deploy.

About the author:

Alberto Rizzi is a policy fellow at the European Council on Foreign Relations, based in the Rome office. Previously, he was a pan-European fellow and a visiting fellow with the European Power Programme at ECFR.

Access the original publication here