Trump’s tariff threats push Europe to gear up for trade fight

The European Union has long ardently defended the rules-based system for free trade, and last month announced a breakthrough on a giant trade deal with four South American countries. At the same time, the bloc is preparing a combination of carrots and sticks to respond to Trump’s plan to use tariffs to achieve domestic and foreign policy objectives.

Europe wants to avoid an all-out trade war. The U.S. is the EU’s biggest trading partner, with total two-way trade and foreign affiliate sales between the two economies valued at roughly $8.7 trillion, according to the American Chamber of Commerce to the EU.

Any U.S. move to impose global tariffs of up to 20%, as Trump has threatened, would damage Europe’s already ailing economy and weigh on the bloc’s exports to the U.S.

Higher U.S. tariffs on China could redirect cheap products to Europe in a double whammy for the bloc’s domestic manufacturers.

EU officials hope to head off some of those threats with proposals that could include pledges to buy more American liquefied natural gas and defense supplies and an offer to team up with Trump in confronting Beijing. The bloc could also commit to shouldering more of the financial burden of supporting Ukraine, and member states could boost military spending, The Wall Street Journal has reported.

In case those overtures don’t work, the EU has prepared a range of options for retaliation, which diplomats have said could include tariffs that target products from politically sensitive U.S. states. After the first Trump administration put tariffs on EU steel and aluminium in 2018, the bloc hit back with duties on classic U.S. products including bourbon and Harley-Davidson motorcycles.

One challenge facing the EU is the president-elect’s unpredictability, which makes it difficult to prepare for any actions he might take once he is in office. Trump’s advisers have different views on the effectiveness of tariffs, with some warning about inflation risks from across-the-board levies.

Trump’s trade plans could also link up with broader tensions with the EU over regional security, support for Ukraine and the president-elect’s interest in Greenland. Officials are prepared to discuss a range of issues with the new administration and will seek to position the EU as a partner that can help Trump achieve some of his goals.

The EU plans to work with the incoming Trump administration toward mutually beneficial outcomes, a spokesman for the European Commission, the EU’s executive body, said Friday. But he added, “If necessary, we will defend our legitimate industries, our companies and our member states."

The EU, which is itself at heart a free-trade zone, has long based its approach on a view—once championed by presidents Reagan and Clinton—that free trade is a path to global security and economic growth. Its response to trade conflicts typically involves lengthy investigations and proportionate retaliation.

Instead of joining the U.S. in slapping 100% tariffs on Chinese electric vehicles last year, the EU held a monthslong investigation into Chinese subsidies that led to additional tariffs of up to about 35%. And it earlier resisted Biden administration efforts to persuade it to join forces and impose punishing tariffs on Chinese steel, in part because of Europe’s concerns about World Trade Organization compliance.

But if Trump follows through on some of his trade threats, potentially rewriting global trade flows, the bloc could face pressure to build higher walls. Possible responses include retaliatory tariffs against the U.S. and new duties on China, either to appease the U.S. or defend against rising Chinese imports.

​“It’s really hard to say, politically, just take it on the chin and don’t respond," said Jennifer Hillman, a trade expert at Georgetown University and a former WTO official.

She said she expects the EU and others to structure any responses to be as compliant as possible with WTO law and to avoid escalation. “But they don’t have many good cards to play," she said.

Even a deal to avert U.S. tariffs could require pragmatism. “We want to stick as much as we can to the rules-based order and the WTO," an EU diplomat said. “But it is going to be difficult to do so in negotiating with Trump, because he doesn’t care."

Brussels is responsible for trade policy, but the EU’s 27 member states will ultimately drive its approach. That might complicate the bloc’s response because some countries are eager to do everything possible to calm trans-Atlantic tensions while others might see political benefits from strong retaliation.

The EU created an arsenal of tools in recent years to give it more options for responding to trade and other economic tensions. They include new powers to deal with economic coercion and to push back against procurement practices that the bloc believes are unfair. Another law allows the EU to bar certain businesses from winning large public contracts if they received foreign subsidies that are deemed to distort competition, and has sparked complaints from China.

The changes might not be enough for some European leaders. French President Emmanuel Macron recently questioned the bloc’s insistence on sticking with global trade rules. He said the EU’s tariffs on Chinese EVs weren’t adequate to protect industry.

“The rules of the WTO are no longer respected by either China or the United States of America," Macron said this month. “It’s not working."

The EU’s trade commissioner, Maroš Šefčovič, said the bloc is committed to the WTO but believes it needs to change. “We must reinvent the WTO so it can successfully overcome the problems we face in today’s trading system," he said during a visit this month to the organization’s Geneva headquarters.

Some officials and trade experts believe Trump’s threats strengthen the EU’s incentive to double down on free trade with the rest of the world.

EU officials secured a preliminary deal in December with the four South American countries that founded the Mercosur customs union, after years of negotiation and despite opposition from France and Poland. On Friday, the EU announced a revamped deal with Mexico that will cut tariffs and other trade barriers between the two economies if it is approved.

“Many countries will feel the need to stick together," said Cecilia Malmström, a former EU trade commissioner whose term overlapped with Trump’s first presidency. “If we work together, we could be stronger."

A recent report by the Germany-based Kiel Institute for the World Economy found the EU’s economy would be hit much harder by a breakdown in the rules-based trading system than it would by U.S. tariffs alone.

That means the EU should try to keep the global trading system as intact as possible, said Gabriel Felbermayr, director at the Austrian Institute of Economic Research and one of the report’s authors. “Failing to do so would damage the EU’s trade interests with many other countries," he said.

Laurence Norman contributed to this article.

Write to Kim Mackrael at kim.mackrael@wsj.com