Donald Trump has set off alarm bells in Europe and China

The European Union and China are girding themselves for a new and far more threatening trade war should Donald Trump regain the presidency.

The EU has set up a taskforce to draw up a response plan, including retaliatory tariffs, should Trump win and press ahead with his plan to impose a baseline tariff of 10 to 20 per cent – or more – on all imports into the US.

Donald Trump’s economic plans would harm the US and its major trading partners if he follows through on them.Credit: AP

Beijing, which has been threatened with a China-specific tariff of 60 per cent on all its exports to the US, appears to be consolidating its grip on the rare earths vital to many advanced technologies, including semiconductors.

From the start of this month, all Chinese exporters have to provide detailed data on how their sales of rare earths are used in Western supply chains. China, which dominates rare earth production and refining, has also been consolidating state ownership of the companies that mine and process rare earths. It has also already imposed some restrictions on exports.

The EU is America’s biggest two-way trade partner and would be hit heavily should Trump return to the White House and use executive powers to follow through with his trade threats. China, which has a significantly bigger trade surplus with the US than the EU, would fear the consequences for its already fragile economy of a new and more intense trade war with the US.

Germany, in particular, would be concerned, given Trump’s fixation with imports of its vehicles and America’s role as its largest market for automotive exports. Where a 10 per cent tariff on EU exports is estimated to slice about a percentage point off the EU’s GDP, the estimate for Germany – Europe’s biggest economy – is closer to 1.5 percentage points.

Trump has talked loosely of tariffs of up to 100 per cent or more as part of a thought bubble involving the use of tariff revenues to fund the abolition of all US income taxes. Should the worst fears of the Europeans be realised, they would also have to contemplate the prospect that China, effectively denied access to the US market, would look to Europe as the dumping ground for its already swollen excess manufacturing capacity.

When Trump embarked on his last bout of trade wars in 2018, slapping tariffs on some European and Chinese exports, he provoked a response. China placed its own retaliatory tariffs on some key US exports, notably agricultural products, while the EU targeted iconic US products like Harley-Davidson motorcycles, jeans and bourbon whisky.

With an estimated €150 billion ($245 billion) a year of its export revenues at risk with a 10 per cent baseline tariff, the EU has been putting together a list of imports from the US it could hit with a 50 per cent tariff of its own.

Chinese President Xi Jinping. Trump has vowed to hit China hard with tariffs if he wins the election.Credit: AP

Its response would have to be highly targeted and disproportionate to have a material effect, given that it exported about €500 billion of goods to the US last year but imported only about €344 billion.

The Europeans, while disturbed by Trump’s protectionist and isolationist convictions, appear to be hoping that his other core characteristic – he is transactional and loves to deal – might enable them to negotiate something short of an all-out trade war.

A significant card they could play is their relationship with China.

While the EU has responded to the flood of cheap electric vehicles produced in China with tariffs of its own, and has increasingly co-operated with US restrictions on sales of key technologies to China, they have tried to maintain a more neutral approach to China than the US.

They could, depending on what Trump does, either co-operate with the US in limiting China’s economic and geopolitical ambitions or, should their trade relationship with the US become adversarial, look to a closer economic relationship with China.

China, which has a significantly bigger trade surplus with the US than the EU, would fear the consequences for its already-fragile economy of a new and more intense trade war with the US.

China’s stranglehold on critical minerals – minerals vital to the advanced semiconductors that are key to sectors like artificial intelligence, electric vehicles and military technologies – means it has a significant asset it could deploy in any new trade war.

Last time, its restrictions on agricultural imports from the US forced the Trump administration to pay $US28 billion ($42.4 billion) of compensation to US farmers. China would inevitably do as the Europeans are contemplating, and again target politically sensitive sectors of the US economy.

None of this would be good for anyone. There are estimates that Trump’s 10 per cent baseline tariffs would cut 1 per cent of global GDP. The International Monetary Fund has forecast global GDP growth of 3.2 per cent this year but has said higher tariffs by mid-2025 could cut 0.8 per cent from growth next year and 1.3 per cent in 2026.

The EU is America’s biggest two-way trade partner and would be hit heavily should Trump return to the White House.Credit: AP

There would also be substantial self-inflicted pain for the US should Trump win and follow through with his threats. It would shrink the US economy, cause a blow-out in US deficits and debt, and cause inflation and interest rates to rise significantly even without retaliation from America’s trade partners. If they retaliate the impacts would be significantly greater.

Trump’s economic illiteracy – he doesn’t understand how tariffs work and are paid for – would be costly for the American households and businesses that would actually pay what’s effectively a consumption tax via higher prices. His tariffs would be extremely regressive, hitting lower-income households hardest.

The EU also, of course, has another challenge should Trump be re-elected – Ukraine.

While the EU has provided more funding to Ukraine than the US since the Russian invasion, the US has provided far more military equipment.

The EU might not be able to replace the US as a supplier of weapons and ammunition should Trump withdraw support for Ukraine, but it is trying to “Trump-proof” Ukraine as much as it can while the Biden administration remains in place.

The G-7 has finally agreed on the details of a $US50 billion loan to Ukraine, funded by the earnings generated from $US280 billion or so of Russian central bank assets held by European clearing houses, with the US providing $US20 billion.

The EU is also trying to agree to a significant lift in defence spending along with more and longer-term financial support for Ukraine and its defence, worried that Trump might do more than just threaten to pull out of NATO this time.

For America’s two largest trading blocs and two of the world’s three major economies, the next week’s lead-up to the US election will be anxiety-inducing, as indeed it will be for the rest of a world accustomed to a largely open global trade environment.

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