Making Europe great again

English original of article published yesterday in Italian by La Stampa

It looks as if one of the major achievements of Donald Trump’s second presidency will be to make America weaker and Europe stronger. “Tariff man”, as he proudly calls himself, seems determined to cause an American economic recession through his erratic decisions on raising taxes on imports, while at the same time he is inducing Germany to lead a revival of European industry by means of a vast increase in defence spending, thanks to America’s abandonment of Ukraine.

President Trump inherited a strong economy from Joe Biden, with unemployment low and growth stronger than in any other big, industrialised country, a positive picture spoiled only by memories of quite rapid inflation in 2023. Some of that economic vitality came from high levels of public borrowing but also business investment was high, in part because of enthusiasm about new technology and subsidies for the energy transition. His electoral promises to cut taxes and eliminate business regulations made American share prices soar. But now the equity gains made since the November 5^th election have been lost, and business confidence is slumping.

This is all his own work. Normally, when economic prospects change it is the result of a number of coincident factors. But the normal influences, such as energy prices, the value of the dollar, interest rates or technological change have been stable or even quite favourable. The only thing that has changed is that Trump has chosen to demonstrate how powerful he is by imposing higher tariffs on all goods imports from China, by announcing 25% tariffs on all steel and aluminium imports from March 12^th, and by threatening, then delaying, then announcing again, then modifying, 25% tariffs on goods imports from America’s two closest trading partners, Canada and Mexico.

The biggest reason why this behaviour promises to damage the American economy is that Trump’s decisions keep on changing. Companies cannot make long-term investment plans about new factories and products amid such an unpredictable and changeable environment. The second reason is that any company that depends on imported materials, components or finished products suffers a rise in its costs whenever these high import taxes are imposed. They must either pass the costs on to consumers through higher prices, or they have to accept reduced profit margins. Neither is good for investment.

This week, when Trump announced his tariffs on imports from Canada and Mexico the protests from affected businesses were immediate and he backtracked in less than 24 hours. Officially he just suspended the new tariffs for one month for all goods which obey the rules of the trade agreement his first administration negotiated with those two countries in 2018, which means goods that are mainly made in one of those countries rather than imported from outside; in practice, this modification to soften the impact seems likely to endure. This suggests that pressure from the business community, which is always strong in the United States, can make him see sense.

Possibly, this will be the case. The unpredictable economic policies of his opening weeks in office might be replaced by more stability. However, it would be a mistake to rely on this hope. The nearest thing Trump has to an ideology is his belief that tariffs not only make a country rich, as they earn tax revenues, but also that they provide leverage with which to achieve other goals.

In using tariffs against goods from Canada and Mexico he may have thought he was targeting weak opponents from whom he could easily extract concessions, but these are two economies so closely intertwined with America’s markets and supply chains that the domestic backlash was swift and loud. Now, however, he is likely to move on to targeting opponents whose economies are less intertwined with America’s so that the backlash will be less and the potential gains from leverage greater. That almost certainly means Europe.

Last week Trump made the extraordinary claim that the EU had been set up deliberately to damage America, and that Europe is very “unfair” to American firms. This suggests that he will soon announce 25% tariffs on all imports from the EU, as well as some special penalties for countries that impose a digital sales tax on technology firms such as Meta, Alphabet, Apple and Microsoft.

The real objective will not, however, be to raise tax revenues or even to improve the trade balance between the EU and the United States. It will chiefly be to try to use the tariffs as leverage to persuade the European Commission and member governments to weaken the regulations imposed on the tech platforms by the EU's Digital Services Act. These regulations are intended to combat disinformation and hate speech, but Trump and the tech billionaires around him like to undermine the rules by describing them as “censorship”.

Europe can expect to be in two wars during the coming years: a war against Russia, which is already cutting undersea communication cables in the Baltic Sea and sabotaging factories in Romania, and with European air forces and ground troops acting to try to enforce whatever ceasefire is agreed in Ukraine; and a commercial and regulatory war with the United States, featuring tariffs and the Digital Services Act.

Faced with these threats, Europe is being stirred into action. Germany’s chancellor-elect, Friedrich Merz, has impressed many with his determination to break old constraints on public investment and defence spending; and the European Commission is showing great initiative in finding new ways to finance defence investment. Divisions, especially between pro-Putin leaders such as Hungary’s Viktor Orban and Slovakia’s Robert Fico on one side, and Merz, Emmanuel Macron and Poland’s Donald Tusk on the other, are bound to flare up.

But by providing a second common enemy, Trump may well help bridge these divides. He has succeeded in uniting Canadians against America. Next, he will unite Europeans against him and in suspicion of its old American ally. It will be quite an achievement.