Tariffs Are Not Child’s Play – The EU Must Act with Care

History does not repeat itself, but it has taught us that tariffs are not to be trifled with.

Director-General Anders Ahnlid

This was clearly demonstrated by the last significant unilateral tariff hike in the U.S., the so-called Smoot-Hawley Tariff Act of 1930. Other countries responded by raising their own tariffs. The ensuing trade war deepened the Great Depression, which preceded World War II.

Now, incoming U.S. President Donald Trump has announced plans to impose a general tariff increase of 60 percent on imports from China and 10–20 percent on imports from other countries. If these hikes are implemented – and there is no reason to doubt that they will be – it would mark the largest unilateral American tariff increase since the Smoot-Hawley Tariff Act.

After the end of World War II, the U.S. led the world into the General Agreement on Tariffs and Trade (Gatt), and subsequently, together with the EU, into the the World Trade Organization (WTO). Two critical components of these agreements were the reduction of tariffs and other trade barriers and the establishment of predictable trade conditions over time.

By the time the WTO was established in 1995, industrial tariffs had been reduced from an average of nearly 40 percent after World War II to around 4 percent. Moreover, tariffs were formally "bound" under WTO rules, meaning a country could not raise tariffs above the bound level without compensating other nations.

This framework was a key driver behind the rapid growth of global trade in the second half of the 20th century, which in turn fostered growth and prosperity in countries that adhered to these rules.

Trump’s proposed tariff increases would constitute a flagrant violation of WTO rules. Their implementation would effectively mean that the U.S. is abandoning the WTO, a step already partially taken by refusing to appoint judges to the organization’s dispute resolution mechanism.

It has long been understood that “a tax on imports is a tax on exports.”

The National Board of Trade Sweden has analysed the potential effects of Trump’s tariffs. According to its general equilibrium simulation, Sweden’s exports to the U.S. would decrease by 16 percent if the tariffs are introduced. The EU’s exports to the U.S. would drop by a similar margin, while China’s exports to the U.S. would plummet by 66 percent.

It is unsurprising that U.S. imports would decrease by 10 percent following the tariff hikes, but perhaps less obvious is the fact that U.S. exports would also drop by 14 percent. However, it has long been understood that “a tax on imports is a tax on exports.” It is also an old truth that tariffs ultimately harm consumers in the country imposing them. Trump’s tariffs are estimated to cost the average American household around USD 3,000 per year.

The National Board of Trade’s calculations regarding the anticipated effects of proposed U.S. tariff hikes do not account for so-called dynamic effects in the aftermath of the hikes or the impact of retaliatory measures from other countries. There is no doubt that countermeasures will be taken by China and other nations. It is also clear that the EU will need to respond to the U.S.’ unilateral tariff increases.

How severe the consequences will be, depend largely on the types of countermeasures other countries adopt.

The question remains how this should best be done. An important principle is that the EU should aim to minimise self-inflicted harm. This is a delicate balancing act, but some key considerations should guide the response:

  1. The EU should base its actions on an independent assessment of its own economic interests and not merely retaliate in kind. Both incentives and sanctions should be considered.
  2. Countermeasures should not be implemented for mere appearances but should aim to make a political impact. These actions need not follow the same considerations as in previous trade disputes with the U.S., where the focus was on targeting the exports and production of specific states.
    Countermeasures do not necessarily have to take the form of tariffs.
  3. The EU may need to accept that, to some extent, the U.S., under Trump, will choose to impose tariffs and partially decouple from other economies. This is the outcome of a democratic election. We cannot base our entire trade policy on the U.S. We need to forge our own path, find new trading partners, and develop new markets for European businesses.

The global trading system faces a bleak future if Trump’s tariffs are implemented. How severe the consequences will be, depend largely on the types of countermeasures other countries adopt. The extent of the damage is difficult to predict. However, one thing is certain – tariffs are not to be trifled with.


Anders Ahnlid
Director-General

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