The wisdom of Europe’s “great capitulation” to Trump tariffs

In the classic protection-for-sale model, tariffs are imposed mainly because industry lobbies to ban imports. The costs are borne by consumers, but the increase is spread across millions of households and is too small for them to notice. The same is not true for countries whose exports are subject to tariffs: they tend to feel the pain and respond with tariffs of their own, often aimed at politically important export sectors, in the hope of creating pressure to change course.

Past transatlantic trade disputes – notably the 17-year dispute between Airbus and Boeing that ended in 2021 – have followed this pattern. Even the infamous Smoot-Hawley tariffs of the 1930s fit this pattern: sectoral lobbying forced the U.S. to sharply raise tariffs on most imports, prompting retaliation from trading partners. World trade declined sharply. The US, which had been running a trade surplus, eventually reduced its own exports, exacerbating the Great Depression.

Trump’s “different path”

But Trump’s so-called reciprocal tariffs were different. They were not the result of lobbying by special interest groups; on the contrary, many business associations opposed them. Instead, they were presented as a response to the deterioration of U.S. industry caused by the large U.S. trade deficit, which was thought to reflect unfair trade practices by other countries. The U.S. did not specify specific damages, as required by World Trade Organization rules, but invoked the principle of reciprocity. They were supposed to correct the overall unfair trade dynamics that Trump allegedly found.

At least that was the original rationale. Trump also advertised the huge revenues the tariffs were supposed to bring and emphasized their usefulness as a foreign policy lever. But in fact, Trump’s tariffs were probably mostly a political message, with protectionism serving as an effective means of attracting voters skeptical of globalization.

This changes the logic of the answer. If tariffs are narrative tools rather than traditional distributional transactions, their removal depends on internal political dynamics that retaliatory measures would not necessarily change. Instead, the goal of traditional retaliatory measures – to cause visible, concentrated political suffering and thereby create an electorate that will lobby against tariffs on economic grounds – is increasingly achieved by the tariffs themselves.

When Trump announced retaliatory tariffs, many expected that foreign suppliers would have no choice but to cut prices to maintain their share of the large U.S. market. But that hasn’t happened, perhaps because, despite its size, the U.S. accounts for only about 15% of global imports. Instead, there is strong evidence that U.S. consumers and importers bear more than 90% of the costs associated with tariffs. As a result, Trump’s tariffs are extremely unpopular with U.S. consumers, and opposition from businesses is widespread, albeit fragmented.

Some might argue that retaliation remains critical to prevent Trump from raising tariffs even further. But China tried it, and it did not prove to be a worthy example. First, U.S. tariffs on Chinese goods remain at around 30%. While this is significantly lower than some tariffs imposed by the U.S. over the past year, it is much higher than the tariffs faced by the European Union, Japan or other economies that have not retaliated.

To be sure, opposing Trump has had domestic political value for China, whose engagement with the U.S. must be viewed through the lens of strategic rivalry. The Chinese government’s internal legitimacy and external credibility depend on the impression that it will not allow itself to be pressured by anyone, including the United States.

The EU did not escalate and won

But the EU is not engaged in this kind of systemic competition with the US, so its calculations must be largely economic – and economic calculations do not justify escalation. After all, just as Americans are bearing the costs of Trump’s tariffs, Europeans will have to bear the costs of any retaliatory measures. And why? The scalability of US tariffs has always been politically constrained from within.

Trump’s reciprocal tariffs were so unpopular that he didn’t even dare ask Congress for authorization. And the U.S. Supreme Court issued a belated but predictable ruling that Trump’s use of emergency powers to circumvent Congress exceeded his authority, leaving his administration to urgently seek new legal justifications for unilaterally imposing tariffs.

From this perspective, criticism of the EU for its “grand capitulation” to Trump is misguided. Yes, last summer the EU agreed to an asymmetric agreement that would have been considered a de facto capitulation in traditional trade diplomacy. But accepting that agreement effectively guaranteed that the U.S. would continue to hurt itself by imposing high costs on its own companies and consumers, while taking the economically sensible step of reducing Europe’s residual tariffs.

In international relations, narratives can matter more than substance. That is why EU leaders need to adjust their statements, not their policies. Instead of implicitly adopting the traditional view of trade negotiations, they should emphasize that, given its trade surplus, Europe can be confident in its external competitiveness. If the U.S. decides to tax its own consumers and producers, that is its sovereign choice, but Europe will not follow suit.

This rhetoric accurately characterizes the US as paranoid and self-destructive, while the EU represents a confident, open to the world and economically rational organization. While the EU may have lost the first battle in trade rhetoric, its “grand capitulation” has proven to be a winning strategy that has protected its companies and consumers from unnecessary taxes, deterred U.S. economic aggression, and helped preserve the global trading system.