Europe's Opportunity

“The US and China are pursuing a national policy. The EU should offer an alternative.

 

With the slogan "America First," Donald Trump has begun his confrontation with partner countries and others. While presidents before him have also had the US's interests in mind, Trump is increasingly focusing on perceived short-term successes and neglecting long-term effects.

 

His erratic foreign policy demonstrates this daily: NATO partners can no longer be sure of US support in an emergency. Ukraine is experiencing anew every day how far US support extends. Both strengthen Russia and weaken the long-term interests of Western countries, including the US.

 

Another example is his tariff policy. From an economic perspective, countries with economic power can certainly gain short-term advantages through tariffs. The Americans' unilaterally optimal tariffs against Europe are therefore not zero, but positive. The reverse is also true.

 

But it is also true that both regions benefit more if they jointly forgo tariffs. Cooperation trumps self-interest. The currently negotiated tariff agreement of 15 percent for imports into the US and zero percent for imports into Europe shows where unilateral policies lead: Studies estimate that economic output in the EU will decline by 0.1 percentage points, and that of the US as a whole by up to 0.5 percentage points due to the tariff dispute. However, the agreement does not provide reliability: The joint declaration is legally non-binding, and Trump can raise tariffs again at any time. Moreover, the threats against the EU continue unabated – now Trump is targeting countries with digital taxes on revenues from Google, Meta, and others, and is considering sanctions against EU officials responsible for implementing the Digital Services Act.

 

Uncertainty hampers investment

 

The uncertainty created by this form of policy, in particular, is proving to be a brake on investment. It is therefore not surprising that German companies report that 30 percent of their investments in the US are being postponed, and 15 percent of them are planning to cancel them completely. Studies also show that an increase in economic uncertainty is leading to declines in investment. This is shown by the Economic Policy Uncertainty Index, which is based on the analysis of economic policy reporting in daily newspapers. A recent analysis by the EU Commission for the euro area shows that a sudden increase in uncertainty caused by an exogenous shock reduces investment growth by up to 1.2 percentage points within a year.

 

It is not without reason that the liberal economist Walter Eucken, the pioneer of the social market economy, names the "consistency of economic policy" as one of seven constitutive principles of good economic policy. This principle is increasingly lost.

 

China is also acting increasingly short-sightedly. Lithuania is being sanctioned by Beijing for failing to clear exports because Lithuania wants to open a Taiwanese embassy. Because Australia is demanding an international investigation into the origins of the coronavirus pandemic, Chinese trade with Australia is collapsing, and confidence in the stability of economic relations is being lost. And every company then takes into account in its investment decisions the fear of potentially being exposed to arbitrary short-term trade barriers with China.

 

Alternatives for Europe

 

Germany and Europe must adapt to these new geopolitical realities: long-term cooperation where possible, damage minimization instead of cooperation where necessary.

 

A look at the trade structure shows that the USA and China each account for around nine percent of German foreign trade. It is therefore worthwhile to consider the other 82 percent.

 

53 percent of this goes to the EU.

 

There is a great deal of untapped potential here. According to a recent study by the International Monetary Fund, the regulatory barriers within the EU correspond to a tariff rate of up to 44 percent for goods and 110 percent for services.

 

The EU Commission speaks of the "terrible ten" – ten particularly persistent internal market obstacles that companies experience every day. Anyone who has ever tried to send skilled workers abroad to the EU or participate in EU-wide tenders can relate to this. The expansion of the internal market, which requires cooperation and give-and-take between European countries, holds enormous opportunities for the prosperity of the participating countries.

 

The majority of EU exports, in turn, do not go to China or the USA, but to other regions of the world. There is potential here as well. Trump's arbitrary tariffs have made it clear how advantageous rules-based trade can be. Europe's supposed weakness - its diversity and the impartiality of the countries and the relative powerlessness of the Commission President compared to the presidents of China and the USA – is a strength for international cooperation with countries and regions willing to cooperate.

 

South American countries and India have to worry much less about short-term political interventions in trade with Europe than they do with China and now also the USA. This strength must be exploited – with further EU trade agreements with India, Australia, Indonesia, and Singapore, for example, and the ratification of the trade agreement with Mercosur.

 

To prevail against the USA and China, Europe must become more aware of its own interests. If the players on the other side switch to selfishness, it makes little sense to continue to play a cooperative role. Europe's economic area is attractive, and Europe is large enough to influence global trade. Unilaterally insisting on compliance while others have long since exerted their economic power is not a strategy, but rather inappropriate restraint.

 

A Risky Choice for Trump

 

In the current situation, companies are waiting and seeing. The current tariff package is likely not the final word. No serious economist in the US supports Trump's tariff policy. And the US President is reacting to his environment: The abrupt rise in interest rates on the financial markets on his so-called "Liberation Day" in April, when he announced the high tariffs, forced him to suspend the tariffs the next day. Companies like Apple, which have a direct line to the White House, were able to obtain temporary tariff exemptions for smartphones, computers, and chips. However, the consumer, who suffers most from the tariffs, will not be able to make a significant impact until the 2026 midterm elections for Congress. Trump and his team are aware of this – they will seek to avoid a year without decent growth and potentially rising inflation.

 

The economic relationship with China is about far more than just tariff issues. Competition with a state-controlled economic area requires its own rules and structures. The new EU regulation against subsidies from third countries to companies operating in Europe was an important step in this regard. Companies subsidized by China must disclose their financial support, for example, if they want to acquire European companies or participate in public tenders. The EU can then deny them access.

 

In the long term, however, Europe's most important goal must be strategic independence, and this goal should also guide the EU's negotiations and future steps. Strengthening the internal market and expanding the number of trading partners would be important building blocks for this. A further increase in imports from China, as is currently being observed, is not.

 

Achim Wambach is President of the Leibniz Centre for European Economic Research (ZEW) in Mannheim.” [1]

 

1. Europas Chance. Frankfurter Allgemeine Zeitung; Frankfurt. 04 Sep 2025: 20.  Von Achim Wambach