Thoughts about the EU-US tariff deal

Europe has a new tariff deal with US. I am not much into politics, but this one got me thinking. As a European, what does this say about my future? Some Europeans are relieved, others think it's a bad deal. I think it's tricky business and there's no simple answer.

What's in the deal?

I did not look that closely, but the reported salient features are 15% one-sided tariffs (against European 0%) and a promise to buy more natural gas from US and to invest in the US. The deal is not sealed yet. It can still be rejected by individual European countries. It's still somewhat vague and followup negotiations can fail. Trump's government is particularly likely to demand further concessions or to abandon the deal just a few months later. I think this is actually quite likely and the deal is very temporary.

Who pays the tariff anyway?

The tariff is essentially a tax charged by US government to US consumers, so Europe shouldn't care, but it's not that simple. For products with value pricing, i.e. charging as much as customers are willing to pay, it will be European producers who really end up paying the tariff. For products with cost-based pricing, Americans will pay, but European businesses will lose market share and scale, which creates indirect costs. Meanwhile, their US competitors will be protected domestically and unrestricted in Europe. It will also increase success rate of American startups at the cost of European startups.

The impact is not that huge. Trade is only a fraction of Europe's economy and trade with US is only a fraction of all European trade. Then the 15% tariff is not that high and part of it will be paid by Americans. My back of the envelope calculation suggests the damage is going to be somewhere around 1% of EU's GDP. That's not so much if you consider it's not that long ago that EU regulated VISA/MasterCard fees that used to be around 2% of the sale price of every product.

US already had an unfair advantage

The deal is very clearly one-sided and disadvantageous for Europe though. Yes, US government promotes this as fair and justified. It even said that previous arrangement, which was already advantageous for US, was actually about Europe taking advantage of US. I wonder whether they are delusional or arrogant or just lying. It does not matter now, because it's something outside Europe's control anyway.

But let's set the record straight. US reportedly has trade deficit with Europe, but that only covers physical goods. If you count licenses and services, it likely has a trade surplus. These include particularly problematic US tech monopolies. Europe is happy to engage in fair competition, but there's no way to compete with established monopolies. Activities of US monopolies in Europe amount to US collecting taxes in Europe. Europe tries to limit damage through regulation, like when it capped VISA and MasterCard fees, and by slapping US monopolies with multi-billion euro fines. It's not enough. US relationship with Europe is already exploitative and the tariff deal just makes it worse and much more obvious.

Divide and conquer

Even as these talks about tariffs were just getting started and there were other signals demonstrating newfound US arrogance and imperialism, it occurred to me it would be better to negotiate together. If US is hostile, then form an encircling alliance that the US cannot bully into submission.

So what went wrong? It might have been incompetence on the part of negotiators, but there are also some real challenges to such wide alliances. EU and Russia do not talk. China's leaders are arrogant and think they don't need anyone else as evidenced by recent mistreatment of Europe's delegation in China. China also kind of hoped for a big fight between US and Europe as that would help its geopolitical agenda. There is a lot of other animosity among prospective members of such an alliance. Plus the US problem is very new and alliances take time to build. And even if the alliance was formed, there's no guarantee US wouldn't be able to break it up.

Monetizing trust

I think it was impossible for Europe to negotiate a fair deal. US has earned considerable trust over the last several decades, which allowed Europe to optimize for good relations with US and focus effort on more pressing issues. Yes, there were some conflicts and betrayals, notably what we have seen in the Snowden leaks, but that was nothing compared to Trump.

Trump essentially burned all that trust and converted it to cash. He was bound to get an advantageous deal for this simple reason. Whether that's a good tradeoff is up for US voters to judge. I personally think it's a mighty stupid waste of prior investments. What we however know for certain already is that even if Democrats win the next elections, there will be no easy way to regain lost trust. Faced with unrecoverable loss of trust, the next Democrat president will have no other option but to continue Trump's policy to have something to show to voters. Recovery of the lost trust, if there ever will be one, will come very slowly, likely over several decades.

There's no use in trying to explain this to Trump and his team. They know. They promised big changes to their voters and there are only two ways to bring about quick change: destruction and stealing. You cannot bring about fast changes through constructive work. We have heard a lot about the destructive part of Trump's plan, notably the threats of invading Greenland. Now tariffs are the stealing part. US will have to pay for this eventually, of course. But as far as Trump is concerned, that's the next president's problem.

What should Europe do?

As I have said, US is burning trust and it was bound to get some cash out of it. While there was no way to prevent incurring losses this time around, it's up to Europe to make sure this is not a permanent situation. It has to disable all the levers applied by US, most importantly economic and military dependencies and lack of matching military strength in Europe.

Europe generally finds itself in a hostile international environment. There's the obvious war with Russia. There's the less obvious economic pressure from China. And now the newly hostile US. In these circumstances, Europe's best option is to localize supply of all essential natural resources, products, and services and to build a full range of military capabilities that are well resourced.

That means substituting US chips, software, and cloud services, replacing US monopolies with European ones or with global opensource alternatives. The full range of military capabilities should include shared nuclear weapons program. There are technical solutions that can lock the weapons down in such a way that they cannot be used within Europe. European militaries should rely mostly on drones and other autonomous weapons, because contrary to live force, there's little political resistance to moving weapons to whichever country needs them. Finally, this needs to be supported with increased mining, technologies that bypass minerals not found in Europe, and as a last resort, a diversified set of mineral suppliers.

That's why I was kind of hoping for a trade war instead of a deal. Or at least managed separation of US and European economies. That would force quick and universal effort by European governments. Chances are EU would get a strong, if temporary, mandate to manage the transition with sweeping powers and a large budget. It would be hard for a few years, but Europe would come out stronger and it would negotiate the next deal from position of power. With the current deal in place, there's a big risk that most countries in Europe will lose focus and waste time. If nothing is done, chances are the next deal will be even worse.

To be fair, asking for a trade war is probably unreasonable. Europe cannot substitute US weapons quickly enough to stabilize the front in Ukraine. It doesn't have sufficiently effective nuclear deterrence. US could cause major disruption via its monopolies without many retaliation options. And it would likely mean US occupying Greenland with all its natural resources. Plus a hardline negotiation tactic would not be supported by numerous European governments. EU thus aimed for stability, hoping to use that stability to implement gradual transition.

Quick or slow, separation from US is inevitable. The tariff deal does not prohibit it, but it does contains provisions that do not account for it. Buying more gas from US means reducing diversity of suppliers. It's not even clear whether Europe really needs that much gas and whether this is not slowing down buildup of European renewables. From this point of view, the deal is indeed problematic. If we increase dependency on US, the next deal will be worse.

What should I do?

Basically everything supplied from outside Europe is now a security threat. Even countries that have no dispute with Europe can be coerced by US or other countries to act against Europe. Given these circumstances, the objective should be to buy and use European or opensource products and services. I have a lot to substitute myself. As a developer, this mostly means substituting US cloud services, software, and LLMs. But then, that was already the plan.