A Letter to Europe

You’re stronger than you think. Act like it.

On Friday Donald Trump, claiming that he was unhappy with European negotiating tactics, announced his intention to impose 50 percent tariffs on goods imported from the European Union. A rate that high would virtually shut down trans-Atlantic trade. But on Sunday, after talking with Ursula von der Leyen, the president of the European Commission, he announced that the tariffs would be postponed until July 9.

I have no idea what von der Leyen said, and I’d also note that a huge threatened tariff that may or may not happen in 6 weeks does a lot to increase destructive uncertainty. But let me offer some advice, to the Commission and the EU as a whole: Don’t try to appease Trump. You can’t make any substantive concessions, because your policies toward U.S. exports are already quite favorable. And even giving Trump some kind of symbolic, meaningless win will only embolden him, confirming his false belief that “they’ve treated us very badly over the years.”

Above all, Europe needs to overcome its learned helplessness and act like the great power it is — especially given America’s apparent determination to destroy the pillars of its own strength.

About trade: the EU and the US both have significant tariffs on a few of each others’ products, but until Trump went on his rampage average tariffs were very low — less than 2 percent — in both directions. Trump and those around him rant about European value added taxes, and it’s true that US producers have to pay, for example, 19 percent to sell to German consumers. But so do German producers! A VAT is a sales tax, not an import barrier.

Trump rages about Europe’s trade surplus with America, but bilateral imbalances are normal and innocuous: I run a large deficit with the bodega around the corner, because I buy a lot of their groceries while they do not, as far as I know, subscribe to this Substack.

Furthermore, there’s less to that European surplus than meets the eye. Yes, Europe sells us more goods — physical stuff like cars and olive oil — than it buys. But we sell them a lot more services, things like financial services and software design. Trump only talks about our deficit in goods, but our deficit in goods and services is significantly smaller..

Besides, some of our reported deficit in goods is probably fictitious. According to the official numbers Ireland is responsible for 1/3 of the EU’s trade surplus with America. That’s because according to these numbers Ireland sells 6 times as much to the US as it buys. But this is almost certainly a figment of accounting trickery designed to avoid taxes.

Here’s how it works: an Irish subsidiary of a multinational company that manufactures, say, pharmaceuticals sells the drugs at inflated prices to the US subsidiary that markets the drugs here. That reduces reported profits and hence taxes in America, while creating big but basically imaginary profits in Ireland, where corporate taxes are much lower.

These accounting maneuvers make it look as if Ireland, and hence the EU to which it belongs, is exporting a lot, but no jobs are created; it’s only about the corporate bottom line.

Yes, the EU should crack down on Ireland’s role as a tax haven. But that hasn’t been one of Trump’s demands.

When all is said and done, the EU’s true trade surplus is probably less than $100 billion, which is basically rounding error compared with Europe’s $19 trillion GDP.

So America has no legitimate grievances against the EU. Nor does America, as Trump likes to imagine, “hold the cards.” The EU isn’t highly dependent on the US market, which buys only around 3 percent of what it produces; U.S. corporations, which have invested trillions in Europe, are dependent on European goodwill. On Monday Friedrich Merz, Germany’s Chancellor, warned that U.S. technology companies might be targets if the trade conflict escalates. It’s a credible threat.

But isn’t Europe a declining society, increasingly becoming a “museum of past success”? No. Try spending some time in Europe — not at overcrowded tourist destinations, but in cities and at companies where real people work. These are highly educated, highly competent nations where many things work quite well.

It’s true that European economic growth has lagged US growth for a generation, a point strongly emphasized by last fall’s Draghi Report, which was a much-needed call for reform. But even that report acknowledged that Europe’s lag is basically confined to the tech sector, that the rest of its economy remains quite dynamic:

Excluding the main ICT sectors (the manufacturing of computers and electronics and information and communication activities) from the analysis, EU productivity has been broadly at par with the US in the period 2000-2019 … For 2013-2019 the role of ICT is even more striking, as the EU productivity growth excluding the main ICT sectors exceeded that of the US by some margin.

Obviously lagging behind in the industries of the future is a big deal, and Europe needs to develop a strategy to catch up. But that catchup may be easier than expected given Trump administration’s determination to engage in self-mutilation, crippling the scientific research — and the research universities — that drove past U.S. success.

Of course, if Europe doesn’t rise to the occasion, leadership may move to China instead. But that’s a topic for another day.

For now, the message for Europe is to stand up for yourself. In trade, in GDP, even in everything but the most advanced technology, you are no more dependent on the United States than the US is on you. There is nothing compelling you to cater to the delusions of America’s mad king.

MUSICAL CODA