Note: our tariff profile with Europe is a mutually agreed upon , less than 2% , arrangement. It’s working and was previously agreed upon. Why change what works?
The explanation of the Economics of Tariffs by Paul Krugman
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 servicesis 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, aredependent 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.