The EU's Instruments in the Upcoming Trade Negotiations
Executive Summary
The EU has its Anti-Coercion Instrument at its disposal, which allows it to have state-like powers when imposing retaliatory measures, with no explicit limit.
The European Commission's retaliatory approach will likely result in new tariffs on goods and services.
A more conciliatory approach would involve negotiating with the Trump administration while developing new trade agreements. This could include reviving the MERCOSUR agreement or prioritising new deals with Middle Eastern or Asian countries.
The Need to Respond
In response to “Liberation Day,” the EU has announced a coordinated response that includes targeted tariffs on 18 billion euros worth of US goods. However, with the US announcing a pause on all of its tariffs apart from the 10% ‘blanket tariff,’ both sides of the Atlantic now find themselves in a negotiation period whose outcome will have significant consequences for the private and public sectors of every country involved.
The Anti-Coercion Instrument
The Anti-Coercion Instrument is a legal framework, adopted by the EU in 2023, which allows it to respond to “coercion attempts” by imposing tariffs and quotas. Coercion is defined quite broadly in this document, referring to any measure affecting trade or investment taken to affect the adoption, cessation or modification of an EU act. To implement it, the European Commission must submit a proposal to the European Council, which amends it and approves it using Qualified Majority Voting (QMV). The use of QMV means that a large majority of member states, including member states representing 65% of the EU population, must approve it. More than simply allowing for an increase in customs duties, it can also justify not applying international obligations in numerous fields (international property rights, insurance, banking, chemicals…). In practice, under this instrument, EU tariffs on US imports of steel and aluminium have been announced but immediately paused for 90 days to “leave space for negotiation”.
The specificity of this tool is its ability to activate and deactivate it immediately, giving the European Commission almost executive powers over tariff establishment. As a result, new tariff sets can be implemented in a matter of days. Additionally, the legislation allows the European Commission to demand reparations for the negative economic consequences caused by the coercion attempt. While the latter is unlikely to be used, it reinforces the understanding of this tool as primarily a deterrence. Given this context, the ACI should be understood as a defence mechanism and a deterrence tool, which would reinforce the assumption that the EU will enter and conduct negotiations with the objective of de-escalation and a return to the pre-liberation day status quo.
Building New Alliances
To both prepare for the worst and gain an upper hand in negotiations with Donald Trump, the EU is developing new trade relations worldwide. After the initial news that talks would be resumed with the United Arab Emirates, the EU announced it would initiate negotiations with Malaysia, Thailand, the Philippines, and Indonesia. These represent significant opportunities for EU exports, particularly concerning machinery and transport equipment. Still, establishing free trade agreements with the EU is lengthy, so these new negotiations cannot be seen as short-term alternatives to declining US market access.
Additionally, the EU has reached a political agreement with Mercosur on the 6th of December 2024. What will emerge from it will result from a lengthy legislative process, which entails decisions from the European Court of Justice on the nature of the agreement. While a large influx of Mercosur’s raw material will not act as a credible alternative to US goods, the EU’s potential access to a new market to export to is likely to be used as an argument, presenting the EU as an autonomous actor in the international system rather than a US dependency.
Adopting the trade deal will likely significantly mitigate the effects of US tariffs on European companies, particularly those producing pharmaceutical products, machinery, and automobiles. However, just like the opening of negotiations with new partners, this trade deal is more of a tool the EU can use in negotiations to reinforce its position rather than a short-term solution to tariffs.
Bilateral Negotiations
Trade is an area of exclusive jurisdiction of the European Commission, which means that the Commission is not only allowed but also solely responsible for elaborating and signing international trade agreements. In practice, this means that individual heads of state are not responsible for conducting trade negotiations. However, the Trump administration's personality-driven policymaking means that individual relationships matter more than diplomatic procedures. This explains why Giorgia Meloni met President Trump to discuss tariffs and potential trade agreements rather than Ursula von Der Leyen, whose rocky relationship with the president is no secret.
The punitive approach: Currently, most of the discourse concerning tariffs concerns solely goods, probably because the US is one of the world's most important exporters of services. Indeed, US companies represent 80% of the EU’s services imports, which grants the US an essential surplus in that trade balance.
Digital Service Tax: European countries have gradually implemented this tax to target tech giants with no physical presence in their country. In practice, countries tax revenues rather than transactions, as tech giants do not have permanent establishments in those countries. For example, the 2019 creation of a French DST, which imposed a 3% tax on digital revenues made in France, particularly affected US tech giants who often had a presence in Luxembourg and Ireland due to their more advantageous corporate tax rates. The subsequent response of the United States at the time, the imposition of tariffs on French cheese and wine, shows the sensitivity of this topic for the US.
Under ACI, the EU could enforce an EU-wide DST, severely affecting the GAFAM and the United States. However, in practice, this would be difficult for various reasons. Firstly, it would be difficult to justify considering the EU openly supports the ‘Pillar One’ initiative of the OECD, an initiative incompatible with the long-term implementation of such tariffs. Secondly, according to Bertin Mertens, a senior fellow at Bruegel, due to the difficulty of pinning down what is a cross-border or local delivery of a digital system, such taxes are likely to be ineffective or even to affect EU users rather than US services.
The benevolent approach: Another tool Brussels can use in negotiations is the newly announced 800 billion budget for defence, which includes 150 billion euros worth of funds to procure defensive material. Currently, EU procurement from US companies is not allowed within the framework of this agreement. Still, the EU might be willing to negotiate this choice, particularly when considering the heavy reliance of its northern and eastern member states on US material, and the possible inclusion of UK companies in the foreseeable future.
The other card the EU can use is its strong manufacturing industry, one of its last sources of productivity growth. The US has long started outsourcing its production of “mid-tech” manufacturing to Europe and Asia, and cannot meet its demand for machines and cars. The United States’ shipbuilding industry is also dire compared to its French and German counterparts, and Airbus produces twice as many planes as Boeing. Of course, this power is to be wielded with caution, considering the US’s domination in software services and tech goods.
The Risks
An aggravation of the tariffs imposed on Europe. Currently, the EU pharmaceutical industry is exempted from tariffs, which, if removed, could significantly harm member states, as it is the most important EU export to the US.
The EU may target US services by creating a general Digital Service Tax, which may have significant consequences not only for US tech giants but also for European advertising firms and even European consumers.
The EU may start prioritising new relations with Mercosur member states or new partners in the Middle East or South East Asia in opposition to the US market. This decision is even more likely to take place if negotiations do not lead to de-escalation.
About the author
Alexandre Doré: Programme Analyst - Europe Programme
Alexandre Doré joined London Politica's Europe Desk in 2024. He is pursuing a master's degree in European and International Politics and Policy at the LSE and holds a first-class bachelor’s degree in International Relations from King’s College London. Alexandre has previous experience in policy-making in France and for various non-governmental organisations. He specialises in the European Union, particularly in EU foreign policy or defence matters. His work on European defence has previously been published in the Future Europe Journal.