Europe Is Still Figuring Out How to Respond to ‘Liberation Day’

T he “liberation day” tariffs announced by U.S. President Donald Trump on April 2 did catch the European Union, America’s largest trading partner, by surprise, as they have also surprised the markets. Yes, Trump has described himself as a “tariff man,” and yes, he has consistently advocated tariffs since the 1980s, but the precedent of his first term, which was evidenced by a relatively pragmatic approach toward tariffs, seemed to have convinced many that in the end, Trump was always up for a deal.

In fact, pressed probably by the market turmoil that followed liberation day, the president has already shown some flexibility, pausing the tariffs for most trading partners for 90 days, while also providing relief for specific companies badly dependent on China, such as Apple, by exempting electronics from the 125 percent tariff on Chinese imports.

Trading partners are currently figuring out strategies to get relief. The European Union is offering “zero-for-zero” tariffs on cars and industrial goods. So far, though, this hasn’t convinced Trump, who has suggested that the EU should commit to buying $350 billion of American energy instead, apart from scrapping nontariff barriers, such as the EU’s proposed or recently introduced green regulations that place heavy burdens on non-European companies trying to compete in the EU. Trump has also described VAT as a non-tariff barrier, but also in the U.S., few consider that to be the case.

Apart from the carrot, the EU is also threatening with the stick. It may well employ its so-called Anti-Coercion Instrument (ACI) against America. This is a new regulatory toolbox allowing the EU to respond to actions by trading partners when World Trade Organization instruments are not helpful. The ACI was originally meant to be used against China, which had been bullying Lithuania in 2022, among others, by temporarily removing Lithuania from China’s customs clearance system after it had agreed to the mutual establishment of representative offices with Taiwan.

European governments still need to decide how to respond to the liberation day tariffs. One of the options is a tax crackdown against U.S. Big Tech. This would be separate from the Anti-Coercion Instrument. This basically amounts to the European Commission instrumentalizing its competition policy for trade-war purposes, without openly saying so. France is pushing for this, but Germany is currently blocking it. Italy is afraid of retaliation against its exports to the U.S. A legal challenge at the World Trade Organization is on the table, even if there is little likelihood that the Trump administration would pay attention to it. According to the recent reports, in an attempt to limit escalation, for now, the EU would not retaliate against the U.S. in the domain of services, such as Big Tech or Wall Street. Instead, it would limit itself to counter-tariffs on goods. The EU Commission has proposed counter-tariffs on U.S. exports into the EU worth some €95 billion ($107 billion) in the event that negotiations to end the trade dispute fail. Among the sectors that could be hit are aerospace (Boeing, for one), alcohol (such as Bourbon whiskey), and agrifood products.

Shortly after April 2, EU governments agreed to impose tariffs of up to 25 percent on a broad range of exports from the U.S., starting in mid-May. These measures did not come in retaliation for the liberation day tariffs but were instead a response to an earlier series of U.S. tariffs on steel and aluminum dating back to the first Trump administration. Within a few days, the EU paused these retaliatory tariffs “to give negotiations [over the liberation day tariffs] a chance.” Furthermore, EU member states are now urging the European Commission to hold back on retaliation against President Trump’s April 2 tariffs until the NATO summit in June, as they consider a deal with the U.S. president on Europe’s medium-term security the priority.

A Changing Sentiment

In Europe, many fear — understandably enough — that Trump’s trade policies may reflect a deeper trend in both the Democratic and Republican Parties. A similar shift is evident in the EU.

For a long time, the European Commission favored a dirigiste model when it came to internal regulation, but when it came to trade, it tended to prefer a more liberal, free-trade stance. That has changed, particularly after the U.K. voted for Brexit in 2016. Since then, the Commission (which is responsible for handling the EU’s external trade relations) has concluded only a handful of deals. Last year, the German chancellor criticized the EU Commission for this, complaining: “We haven’t handed over our competence in trade policy and trade agreements to the European Union so that no agreements are concluded.” An important reason for the failure to finalize agreements has been that Brussels had increasingly tried to use — or abuse — trade negotiations to impose its regulations on its trading partners. Brussels considers the EU to be the regulatory superpower.

This is why the EU-Australia trade deal failed in 2023. The EU had tried to overload negotiations with demands related to agricultural standards. To take another example, last year, the EU Commission had finally managed to “initial” a deal with the Latin American trade bloc Mercosur, which for years had been held hostage by similar issues, such as when the EU suddenly reopened talks by coming up with new demands with regard to environmental regulation. The deal still requires ratification by EU member states. This is rarely a straightforward process even if France is less hostile than normal, seeing a deal as part of a good response to the Trump trade offensive.

In the United States, the EU’s determination to export its regulatory regime has been met with growing anxiety. At the end of last year, Republication Representative Andy Barr complained about the EU’s “regulation factory,” vowing: “An America first agenda will animate ferocious opposition to a European Union that attempts to impose their costly, burdensome regulations on American firms.” Howard Lutnick, the U.S. secretary of commerce, has said that the U.S. may now use “trade tools” in retaliation for European regulations that hinder American companies. This is now also happening. Following Trump’s tariff announcement, the United States Trade Representative (USTR) has highlighted the EU’s Deforestation-free Supply Chain Regulation as an example of “unfair trade practices.”

In a way, the whole series of new green regulations in the EU that passed during the first term of Ursula von der Leyen as president of the EU Commission may come in handy now if the EU is looking for possible concessions to Trump. There are, for instance, the EU’s new CSDDD rules forcing companies to provide details on the extent to which their business partners respect all kinds of environmental and social standards. The EU could simply offer those to the United States as sacrificial lambs given in exchange for tariff relief, especially as many of these measures have not even legally entered into force yet. And then we haven’t even mentioned the EU’s new protectionist climate tariff, the Carbon Border Adjustment Mechanism, which has also been slammed by the USTR.

European socialist politicians are not exactly looking forward to scrapping all of this, but their political clout was reduced by last year’s elections to the European Parliament, which saw considerable gains on the right. Also, the EU Commission is at least open to the possibility of scrapping nontariff barriers.

So there are some grounds for hope. In 2024, the EU Commission’s top trade official, Sabine Weyand, admitted,

We have pushed away a number of partners we need through our increased use of autonomous trade measures; unilateral measures that other countries see as imposing on them extra-territorial effects of our legislation. And they resent that. . . . We need to think about our attractiveness for our trading partners. The Global South and the emerging and developing economies, they do not simply want to copy our legislation, and they say, who has appointed you world regulator?

Quite.