DeAmericanisation, not deglobalisation

English original of article on transatlantic trade published in Italian this morning by La Stampa

A few days still remain before Donald Trump’s negotiating deadline of July 9^th, but the likely terms of transatlantic trade for the next three years are already pretty clear. Politicians, such as Friedrich Merz, Giorgia Meloni, or the “tariff man” President Trump himself, like to think they determine tariff rates and other trade rules, and of course they do have an influence over the details. But the real powerbrokers this year have been financial markets.

This matters, because transatlantic trade matters so much for the European and global economies. In 2024, trade in goods and services between the United States and the European Union totalled a huge €1.68 trillion. That is roughly twice as large as trade between the US and China. Moreover, taking the total trade done with all countries by the EU and the United States, these two blocs account for nearly one-third of global trade. The terms of trade set between them naturally have a global influence.

Trump claimed in February that the European Union was “formed to screw the United States”. We all know that this is not true, especially as the EU was in fact formed during the 1950s with strong encouragement from America. What Trump’s outrageous statement tells us, however, is that he understands that the stakes in EU-US trade are high, for both economies and hence for politics on the two sides of the Atlantic.

Crucially, financial markets understand this too. And, in turn, Trump understands that financial markets are critical for the stability and success of his presidency. When he made his dramatic announcement on April 2^ndsetting high tariff rates on imports from nearly 200 countries, and afterwards kept changing his mind about rates and about “pausing” these import taxes while negotiations took place, the US stockmarket slumped, and so did both the US dollar and the vast US bond market. It looked for a few weeks as if the financial markets might act as the main constraint on his actions.

Now, however, financial markets have recovered their nerve. The US stockmarket is back at record highs. US bond markets, which set long-term borrowing costs for the American government and for corporations, have stabilised, calming fears of a new financial crisis. And this has happened despite the US Congress this week passing Trump’s massive budget bill, which will maintain big annual budget deficits and add an estimated US$3 trillion over the next decade to America’s already huge federal public debt. At US$36 trillion at the end of 2024 that federal debt had reached 123% of GDP¹, not far behind Italy’s 135%.

Financial markets seem to have stabilised because Trump’s statements and actions on trade tariffs have become less erratic and because the US economy is still growing at a healthy rate. Markets seem to be assuming that when all the negotiations have been concluded, import tariffs on goods will end up at about 10% for rich countries (as agreed already with the UK), 20% for poorer, export-dependent countries (as agreed last week with Vietnam) and 30-50% for China. Investors seem to accept that these taxes will raise prices in America, but not by enough to cause worries about inflation.

European Union negotiators still officially hope that the financial markets are wrong and that they can achieve much lower tariff rates for EU-US trade, perhaps even zero tariffs. This hope depends on the argument that although the EU did run a big surplus in goods trade with the US of €198 billion last year, thereby providing Trump with his main grievance, it also ran a big deficit in services trade of €148 billion thanks to Europe’s dependency on US technology giants. The overall imbalance between the EU and US was just a small €50 billion surplus, they will argue.

If financial markets had remained volatile, EU negotiators might have stood a chance of realising their dream. Now, however, their best hope is to match Britain’s 10%, to agree some limits to the higher sectoral tariffs Trump has imposed on steel and aluminium, to avoid higher tariffs on cars, and to fend off any pressure to relax EU regulation of the US online platforms under the 2022 Digital Services Act.

Their best friend in achieving that outcome may prove to be the 10% rise in the value of the euro against the US dollar that has taken place so far this year, for this should give American trade officials confidence that even the small imbalance in overall transatlantic trade is on its way to being eliminated. A 10% rise in the euro plus a 10% tariff rate will make American producers considerably more competitive against European ones.

Will this be enough to satisfy Trump? He will still attempt² to bully European governments into making more concessions, since doing so is in his nature especially in a period when his successes in the war on Iran and in passing his budget have made him feel powerful. However, such last-minute bullying should not be too difficult to resist. Trump’s Treasury officials know that the main benefit from Trump’s protectionist trade policy is coming in tax revenue, with tariffs likely to bring in a useful US$350 billion this year. That income would be jeopardised if a chaotic trade war were to push America into recession.

Many European governments will worry that a 10% tariff on their companies’ sales in America may hurt Europe’s already weak economy. In fact, it is unlikely to make much difference. The rise of the euro will also hurt some exporters, but by reducing import prices and hence inflation the euro will help the European Central Bank to cut interest rates again. Falling energy prices, if that trend continues, will also help support European living standards and reduce industrial costs.

The underlying fact is simple: European businesses can no longer rely on strong demand in the American market to compensate for weak demand at home. If Europe’s economy is to grow, it will have to do so by virtue of reforms that stimulate private investment, with some help from Germany’s expansion of public investment, and by virtue of expanding exports to countries other than the United States. This is not deglobalisation but it may well turn out to be deAmericanisation.

1. This is gross government debt. Some publications prefer to quote “net government debt”, which means net of debt owed by one part of government to another. On that measure, the United States’ debt is just over 100% of GDP.

2. Indeed, after this article was written the US threatened the EU with a 17% tariff on imports of food products, and allegedly on July 7th Trump will be sending “letters” to 12 unspecified countries threatening them with high tariffs. It is not known whether this includes the EU