„The EU is in a strong position”

How should Europe respond to the uncertainty surrounding US tariff policy?
This was the topic of last week’s panel discussion hosted by our Regional Chapter Munich/Bavaria and KPMG.
To find out how to deal with Trump’s ever-changing stance, read the interview with panelist Lisandra Flach here.

Mrs. Flach, after a series of tariff announcements and countermeasures, the United States and China appear to be engaged in a trade war. This will lead to a drastic reduction in Chinese exports to the US. You warn of the risk of Chinese overproduction entering European markets, which could lead to lower prices for German consumers, but also increase competition. Which effect will outweigh the other? And how should Germany respond to this development?

Our simulation exercises show that German imports from China could increase significantly in some sectors in response to the US tariffs imposed on Chinese products, as Chinese firms now search for alternative markets for their products. While this could present an opportunity for some German firms to gain access to cheaper inputs for production, it may also lead to a significant rise in competition that could threaten firms in direct competition with Chinese producers. Therefore, it is important to address potential trade diversion caused by tariffs, not only but especially from China and particularly in products affected by global overcapacity.

Trump’s position on tariffs is permanently shifting. For now, he has proposed a temporary suspension of certain tariffs on European exports and is hitting China with even higher tariffs. What’s next? What should Europe prepare for?

Europe should prepare to negotiate. While it is important to consider and threaten ways to retaliate, it is equally important to explore opportunities for negotiating tariff reductions, which could lower uncertainty for firms and benefit both sides of the Atlantic. The greatest risk for Europe is currently an escalation of the conflict to the multilateral level, potentially triggering protectionism and fragmentation with unpredictable consequences.

How strong is the EU’s position in all this? What countermeasures do you consider appropriate to restore a functioning system of free trade?

The EU is in a strong position and has tools to act in response to the tariffs. It is important to threaten credible retaliatory measures, even if they come at a cost to European consumers. More importantly, it is crucial to negotiate and to keep unity within the EU, as the market power of the EU plays an important role in the negotiations. I welcome the European Commission’s proposal to eliminate tariffs on industrial products between the US and the EU. We have also simulated a scenario in which both the EU and the US lower their tariffs to match those imposed by the trade partner. In this case, both sides would benefit. This result highlights the crucial role that negotiations play in de-escalating trade conflicts.

Prof. Dr. Lisandra Flach is the Director of the ifo Center for International Economics and Professor of Economics at LMU Munich.