Over on Bluesky, the EU-trade-think-tank ecosystem has been making a conspicuously concerted effort to get me to read and comment on this piece by Shahin Vallée:
In essence, Shahin argues that the EU has been too timid with the US and would have achieved better outcomes if it had hit back hard with tariffs and other restrictions from day one.
While I question some of the examples given — he says “China has achieved a complete US capitulation, because it stood firm and used its leverage in critical areas” … but last time I checked the US average tariff on China is still quite a lot higher than the US tariff on the EU — I think we probably are at the point where escalation in the form of new EU tariffs is inevitable. If only to give both the EU something to negotiate away.
But I’ve also been thinking about **why** some countries take different approaches to negotiating with the US than others.
This is still a work in progress, but here are a number of questions I think countries should be/are asking themselves, which, taken together, inform their approach to engaging with the Trump administration (in no particular order):
What is your medium-term tariff assumption? If you assume, for example, that despite Trump’s TACOing US tariffs on products you export to the US are going to remain elevated in many instances, then you are more inclined to negotiate. If you assume he’s going to go full TACO, then it makes more sense to wait and see how things play out.
What is your exposure? If a significant proportion of your total trade is negatively impacted by the Trump tariffs then you are more likely to want to negotiate than if it is relatively small.
What do you assume is/is not negotiable? Will Trump budge on the 10% baseline tariff? Is Trump ready to negotiate down the higher reciprocal tariff (if applicable)? Will Trump lower the car/pharma/steel/fentanyl/etc tariff? Depending on what matters most to you, your assumptions re: each of these questions determine how much effort you put into a negotiation.
Are you targeting absolute or relative gains? This is one of the questions where it is useful to compare the UK and EU negotiations. The UK did a deal that delivers a relative gain (lower car, steel, aluminium, aerospace tariffs and possibly better treatment on pharmaceuticals and other sectors in future) versus the US tariff currently applied to other countries, but still leaves it worse off than pre-Trump 2.0. This is because it accepted that a relative gain was better than no gain. In contrast, at least until now, the EU has pursued a more traditional deal — e.g. “zero for zero on industrial goods” — which would deliver absolute gains, and deliver liberalisation in both directions that goes beyond what existed pre-Trump. Hence no deal.
Are you willing to flex the rules? As regular readers of MFN will know, I’m slightly sceptical of claims re: the sanctity of WTO obligations given all the examples of countries breaching them … but yeah, most countries at least try to abide by their WTO obligations. However, if you are willing to play fast and loose it probably makes it easier to do a weird deal with Trump than not.
Do you have the willingness and ability to retaliate? This is multifaceted, but yeah, are you willing to go toe-to-toe with the President, and do you have the means to back it up? As above, the EU currently has the means [probably] but not the willingness; China has both, and the UK has neither.
Can you absorb pain? This is slightly linked to the question above, but assuming you don’t successfully negotiate and Trump escalates… can you absorb the economic pain and potential political backlash? And if so, for how long?
Do you have the willingness and ability to accommodate? This gets discussed slightly less, but accommodating Trump also comes at a cost. Depending on what he is asking of you, doing so could be unpopular. It is notable, for example, that Japan seems content to drag out its negotiations with the US until after the election. The UK, it turns out, was able to accommodate the US’s ask to signal a slightly more rigid stance on China … can Vietnam do the same? Unclear.
Trade diversion
One of my long-running concerns is that the Trump tariffs will lead to a lot of trade diversion and other countries imposing their own tariffs in response.
This led me to draw this picture and others:
Anyhow, the European Commission has been monitoring said trade diversion and has published its first assessment.
Here is its heat map setting out where a “potentially harmful increase of imports has been detected”:
As Simon Evenett notes in a pointed briefing, the methodology underlying this analysis is slightly … unclear. However, irrespective of that it looks to me as if this is all prep for the EU doing some more tariffs.
Which will mean one thing and one thing only: more drawings by me.
I Tariff You, Pikachu
Thank you to occasional MFN contributor George Riddell for flagging this to me.
Who knew Pokemon were so dangerous …
Snitches get … rewarded
Also with thanks to George, and in line with previous pontification, the US is now going to pay you potentially millions of $ to grass your tariff-dodging neighbour up:
On May 12, 2025, head of the Department of Justice Criminal Division Matthew Galeotti delivered a speech in which he stated that the Department augmented its corporate whistleblower program to prioritize the following subject matters for whistleblower tips: “procurement and federal program fraud; trade, tariff, and customs fraud; violations of federal immigration law; and violations involving sanctions, material support of foreign terrorist organizations, or those that facilitate cartels and [Transnational Crime Organizations], including money laundering, narcotics, and Controlled Substances Act violations.”
Here’s the list of things to watch out for:
There are numerous ways in which an IOR can fail to comply with trade, tariff, and customs regulations. Here are some of the more common failures we see:
Misclassification: The IOR incorrectly labels the type of good shipped, as some categories of goods carry higher tariffs than others.
Underreporting: The IOR understates the volume of goods or the value of the goods as a way of reducing tariff obligations.
Transshipment: Goods are shipped from one foreign country to another before arriving in the U.S. as a way of concealing the goods’ true country of origin, as different origin countries have varying tariff rates.
False country of origin: Like transshipment, but there is no hassle of having the goods shipped to an intermediary before their ultimate arrival in the U.S. Instead, the IOR simply alleges that the goods originated in a country other than their true source.
False documentation: The IOR submits doctored or entirely forged invoices or other documentation of imports.
Get snooping, snitches!
Best,
Sam
The biggest thing that’s missing here is an actual model of what Trump is trying to do with tariffs. So far, the response from folks has largely been to either throw their hands into the air, panic, and insist there can be no rationale behind them at all, or for a bunch of middle aged men who would never dream of voting Trump and who will never have had a genuine good faith conversation with a Trump supporter to give some dubious analysis on what the supposed intentions are and why it surely must be flawed, as if they have suddenly morphed into an expert on the issue.
When one actually looks into it, I’d say the arguments put forward by Michael Pettis do the best job of modelling what’s going on here (https://www.phenomenalworld.org/analysis/trade-and-the-manufacturing-share/), with possibly a few geopolitical aims thrown in.
Based on this assumption, the goal of tariffs will be A: reduce the outright trade deficit, B: force countries with large surpluses to either consume more or sell less to the US, and C: provide a geopolitical boot up the arse to relevant countries.
Under such an assumption, we’d thus expect no removal of the 10% (ensures reduction of overall deficit), persistently high tariffs on China and possibly countries like Vietnam (security threat and trade deficit that won’t be resolved), low tariffs and a cushy deal for the UK and Australia (no deficit and pays their way in defence), scary noises but quietly low tariffs to Canada and Mexico (intended ally but must spend more on security/defence), slightly more substantial concessions from countries like Chile, Peru etc who have removable deficits, and the option for the EU to either face higher tariffs or take measures to reduce the deficit. At that point, the solution is for the EU to figure out what concessions it can make and then just accept the higher tariffs on everything else - counter tariffs are unlikely to achieve anything.
As it stands, this seems like a pretty accurate set of predictions, which would imply the UK’s policy is spot on and the EU’s is doomed to fail.