The Emperor’s New Trade Deal

Tariffs are bad. A deluded president is worse.

On Tuesday Donald Trump went on CNBC to explain why the European Union is facing a tariff of “only” 15 percent. But what he said was simply delusional — and the delusion should be even more concerning than the tariffs.

The Europeans, Trump asserted, had agreed to cough up $600 billion, which he described as a “gift,” not a loan. And he emphasized that this is “$600 billion to invest in anything I want. Anything. I can do anything I want with it.”

So Trump apparently believes that the European Union has agreed to provide him with a personal $600 billion slush fund.

In fact, as I pointed out after the “deal” was announced, the EU agreed to no such thing. In fact, it literally couldn’t have made such an agreement. European nations aren’t command economies in which government can tell the private sector where to invest, and in any case the European Commission, which negotiated with Trump, can’t tell the governments of member states what to do.

So think of it as the emperor’s new trade deal: Trump is strutting around, feeling very impressed with himself, but in substantive terms he’s stark naked.

Does it matter? I’ve seen some commentary to the effect that it doesn’t. Hey, it’s just another Trumpian self-aggrandizing fantasy, like his belief that we have zero inflation, he has a 71 percent approval rating and “people love the tariffs.”

But I don’t think we should feel reassured about Trump’s trade delusions because he’s lost touch with reality across the board.

What will happen if and when Trump realizes that Europe hasn’t actually promised what he thinks it has — or, as he’s likely to see it, that the EU has gone back on its promise? He’s already given us an answer: He’s going to put the tariff on Europe back up to 35 percent.

He may not be able to carry out that threat. In fact, there’s a very real possibility that the courts will rule many of the tariffs Trump has already imposed illegal (which they surely are) and order the administration to refund the money it has already collected.

But assume that the Supreme Court does its usual thing and decides that the Constitution allows Trump to do whatever he wants. How afraid should Europe be of the possibility that Trump will put the tariffs back up, higher than before?

Well, I’ve been trying to do the math, and as far as I can tell putting U.S. tariffs up from 15 to 35 percent would do less damage to Europe than many people imagine. Yes, it would hurt, but not all that much. By making a 15 percent tariff the baseline — what countries pay even if they do make “deals” — Trump has used up a lot of his trade war ammunition, greatly reducing the effectiveness of any further threats.

After all, Europe has never been all that dependent on access to U.S. markets. In 2024 the EU’s exports of goods to the United States were slightly less than 3 percent of its GDP — not a trivial sum, but not enough to make European prosperity dependent on U.S. goodwill.

Trump’s tariffs will make the EU even less dependent on the U.S. market. In Sunday’s primer I explained that the crucial number is the “Armington elasticity,” which measures how sensitive trade flows are to tariffs, and that a reasonable estimate of that elasticity is 3. If we go with that number, we would expect the 15 percent tariff currently in place to cut EU exports to America by roughly a third, to around 2 percent of GDP.

That’s a palpable hit, but not a huge one. Writing in the Financial Times, Richard Milne tells us that reports from European companies are showing surprising resilience. Furthermore, the loss of U.S. business will be partially offset by higher government expenditure in Europe, with Germany in particular boosting spending on both infrastructure and defense.

That’s with a 15 percent tariff. But what happens if Trump pushes tariffs up to 35 percent? My back-of-the envelope calculations say that this would reduce Europe’s exports to the United States by another 0.7 percent of GDP. That is, the hit to Europe if Trump makes good on his threats would be smaller than the hit he has already imposed with the tariffs he plans to keep in place regardless.

This makes sense if you think about it. The higher the tariffs Trump imposes on imports, the less other countries sell to America. And the less they sell to us, the less they have to lose if we push the tariffs even higher.

And that argument doesn’t even take into account the strong possibility that another round of Trump tariffs would provoke retaliation from Europe and other trading partners. The EU has so far chosen not to retaliate against Trump’s tariffs because its officials decided that making a deal, or at least seeming to make a deal, was better than getting into a tit-for-tat trade war. But if it turns out that Trump sees a deal not as the end of the story but simply as the jumping-off point for new demands, I suspect that even the timid bureaucrats in Brussels will eventually decide that enough is enough.

But again, at this point the math of the trade war matters less than the madness that lies behind it.

There has always been a whiff of megalomania about Trump’s tariff policy — a belief that he can use the threat of tariffs to compel other countries to do his bidding on multiple fronts, from promising not to move away from the dollar as a reserve currency to abandoning the prosecution of wannabe dictators who tried to overthrow democracy.

However, by making 15 percent tariffs the new normal — by keeping tariffs high even when countries make, or pretend to make, concessions to the United States — Trump has used up much of whatever trade ammunition he had.

However, Trump will be the last person to recognize that there are limits to his ability to bully the world, on trade or anything else. And that lack of awareness should worry us all.

MUSICAL CODA