With new US tariffs trade war will be inevitable

Observer

09-03-2025

US commerce secretary-nominee Howard Lutnick has hinted that some of the tariffs being imposed by Donald Trump — the ones aimed at Mexico and Canada, to mention two, — are short-term tactics that countries can avoid if they bend to the US President's demands. Others, however, including potentially towards the European Union (EU), may serve longer-term goals of reshaping global trade and manufacturing.
The EU exports more goods to the US than Canada, Mexico and China. Moreover, unlike China, the EU's trade deficit with the United States has grown since 2016 when Trump was first elected. Trump is ever unpredictable, but there are signs that he may wait for some weeks before potentially imposing any such trade measures on the EU and some other powers.
This was outlined in the 'America First Trade Policy' memorandum he released on his first day back in office on 20th January. This points to a potential multi-month window of opportunity for Europe to try to lobby Trump and strike new economic bargain.
For instance, Trump has previously demanded that 'the one thing they (the EU) can do quickly is buy our oil and gas' when asked how Europe could avoid heavy tariffs. So this appears part of a policy by Trump to ramp up US fossil fuel production and exports to deliver on his 'America first' strategy.
Following Russia's war of Ukraine in 2022, the United States is already the EU's second largest gas supplier of Liquid Natural Gas (LNG). To date in 2025, EU countries have imported over half of their LNG from the United States.
European Commission President Ursula von der Leyen has given a potential green light to importing more US LNG, displacing Russia LNG. She said recently 'it's something where we can get into a discussion, also (where) our trade deficit is concerned'.
The UK government believes that Britain may escape this fate as its trade balance with the United States is much more balanced than the EU's. Trump said last month that 'we have a $350 bn deficit with the EU. They treat us very badly, so they're going to be in for tariffs'.
Trump's January 20 memo indicates that his team will seek to develop analyses of persistent US trade deficits, perceived unfair trade practices and currency manipulation among partner countries. It also asks, before April 1, for recommendations on remedies, including a potential 'global supplement tariff'.
Any US move to impose much higher tariffs on the EU, as Trump has threatened many times in the past, could badly damage Europe's economy. Moreover, higher US tariffs on China could redirect cheap products to Europe, undermining the bloc's domestic manufacturers.
A key further question for business is whether there will be reciprocal moves by Europe and other powers in response that potentially ultimately lead into 'trade war' territory. Trump's political style is to try to knock his opponents off balance with unpredictable, 'shock and awe' tactics. So markets may be very volatile in coming weeks as this all plays out.
However, this cannot be taken for granted, as mentioned by an associate at LSE Ideas. As the IMF highlighted last autumn, there has been a big disconnect in recent years between higher geopolitical risk and lower market volatility.
This indicates that asset prices may not fully reflect the potential impact of wars and trade disputes. Such a disconnect makes shocks more likely, because higher geopolitical tension could trigger immediate sell-offs.
So there is no guarantee that this disconnect will continue in the next few years which could increase economic volatility. In such scenarios, some financial institutions may be forced to sell assets to affect balance sheets to meet margin calls or satisfy risk limits. (The writer is our foreign correspondent based in the UK)