Response to US Import Tariffs: EU’s Policy Options

Introduction
Investing.com reports that the European Union (EU) is considering three policy responses to the import tariffs proposed by US President-elect Donald Trump as analyzed by Goldman Sachs.

Trump’s Proposed Tariffs
Trump has indicated that the US may impose high tariffs on imports from both allies and adversaries. The proposed tariffs include a 60% charge on Chinese goods, a 25% surcharge on Canadian and Mexican products, and potentially a 10% duty on global imports.

EU’s Response Options
According to Goldman Sachs analysts led by Sven Jari Stehn, the EU has three potential responses:

1. Tit-for-Tat Tariffs
   The EU could respond with retaliatory tariffs across a wider range of products than those targeted in previous trade disputes in 2018 and 2021, which included various goods like sports equipment and paper products. The analysts predict that the EU would retaliate promptly upon the introduction of US tariffs, but the escalation into a trade war will depend on whether the US abides by World Trade Organization guidelines or acts unilaterally.

2. Defense of Free Trade
   The EU may choose to lessen its support for free trade and adopt a more protective stance towards Chinese imports to placate Trump. Notably, many ongoing EU investigations on imports already focus on Chinese products sold below market value. However, such moves could worsen tensions with China and are considered a departure from the EU’s free-trade principles.

3. Conciliatory Measures
   The EU might adopt a more conciliatory approach by increasing purchases of US natural gas and oil, as well as boosting defense spending. This strategy could help the EU avoid tariffs. Although there are concerns that this commitment might raise European import costs, analysts believe the cost could be manageable through new long-term LNG contracts with US exporters.

   Increasing military spending would be more challenging due to differing fiscal priorities among EU members, but analysts expect that the EU may raise defense spending over the next three years, although it could be slow for the Trump administration’s liking.

Conclusion
Should Trump implement the higher tariffs, the EU is predicted to respond with increased import duties on US consumer goods. The potential for a trade war depends on the EU’s response and fiscal adjustments to counter US tariffs.