Former EU Pol: EU Hoping Markets Discipline Trump on Tariffs So They Don't Have to Act

Malmstrom acknowledged that when she was the top negotiator for the EU, the U.S. and the EU failed to liberalize their trading relationship. Now, she said, the bloc is "laying low and indicating that it’s willing to negotiate a deal" to avoid 20% tariffs on its exports.

Malmstrom, who hosts a regular discussion on trade at the Peterson Institute for International Economics, where sheare is also a senior fellow, hosted a session May 21 called "Tariffs, Tariffs, Tariffs," that talked about the prospects for a deal between the EU and U.S.

Guest Arancha Gonzalez, a former Spanish foreign minister and former chief of staff to the World Trade Organization's director-general, said that European leaders are having great difficulty understanding what President Donald Trump is trying to accomplish with reciprocal tariffs, tariffs on autos and steel and aluminum, and tariffs on its neighbors.

"What you see is multiple contradictory objectives with the wrong tool," she said.

European leaders are troubled by uncertainty that is bad for business, the abandonment of WTO principles and "the very nasty targeting of the world’s poorest countries."

The highest reciprocal tariffs are for the countries that sell the most to the U.S. while buying the least -- which tends to be countries that are trying to climb the development ladder, particularly by producing apparel.

Gonzalez said the EU would like to "sit and wait for [bond] markets to take this into their hands to basically oblige the U.S. administration to course correct."

She added that the fact that the markets have convulsed after some of the tariffs were announced "shows us how wrong these measures are."

Gonzalez criticized the trade deal announced with the U.K., and said it looked to her like extortion.

"You hit someone very hard on the head … to alleviate the pain he has to do something for you," she said.

She said that before Trump returned to office, the tariffs on European exports were between 2.5% and 3%; now they're above 25%. (Although the reciprocal tariff on the EU is currently 10%, European cars and car parts face a 25% tariff, and that's a major export from Europe.)

"It’s unlikely to go back to where it was," she said.

Malmstrom asked the panelists what would happen July 8 -- would the administration extend the deadline, or will tariffs be hiked if deals have not been reached?

Chad Bown, another PIIE senior fellow and former State Department chief economist, said it's "an incredibly important question but also difficult to answer."

He said, "Countries may be presenting them with offers, and they may not know how to evaluate them," because the agencies are overwhelmed and the deputy U.S. trade representatives haven't yet been appointed.

He said he wouldn't be surprised if at the end of the 90-day pause, there aren't big deals yet to announce, and most countries get an extension, but a few countries are slapped with the Liberation Day high tariffs, "to set an example."

In that case, he said, the administration would complain "you didn't give me a very good offer ... ."

Malmstrom asked Gonzalez what the EU should do to prepare for what comes next on tariffs from the U.S.

She said EU officials must communicate their red lines clearly, and she said those include "not being ready to change its choice of regulatory standards or its fiscal choices. Because if that is what this U.S. administration is after this is not within the realm of achievable."

The U.S. argues that digital services taxes and value-added taxes are discriminatory against U.S. companies, but Gonzalez said the U.S. asking the EU to change its taxation policies would be like the EU telling the U.S. it needs to collect more income taxes so that it doesn't perpetually run a deficit.

She said, "There is no reason why there should be a 10% tariff on EU exports," and added, "we've got to be ready to hit back," perhaps by limiting access to U.S. service providers.