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Is there a method to the madness? This is the question on most European policymakers' minds, when the United States is threatening (and implementing) numerous tariffs on friend and foe alike. Sometimes they appear even more targeted on friends than foes.
I have my own suspicions, and while I do not know whether this strategy is going to work, let me explain what I think it is—and how Europe, particularly Germany, should react.
Although Donald Trump sometimes appears a whimsical and capricious commander in chief, it would be too easy to write off the emerging US trade policy as just an eccentricity of the President. The current administration is moving fast and breaking things, because building something new often also means destroying the old. The Austrian economist Joseph Schumpeter talked about “creative destruction” at the heart of every capitalist system. Old ideas and industries are being destroyed, and new ones replace them. This is why we drive cars instead of horse-drawn carriages and take pictures or listen to music with our phones—while almost no one owns a camera or a Walkman anymore.
This process of destruction through innovation not only applies to the economy, but also to government. Although he was originally mocked for it, the so-called “Department of Government Efficiency” has become a real thing. For the moment, it has a very strong focus on the destruction, possibly to be followed by the creation of new, more efficient government structures and processes.
I believe the Trump team pursued a similar policy in the area of international trade. Initial destruction is the first step before rebuilding all of the United States's trade relations with the rest of the world.
The reason why Washington is moving so fast is it is taking the possibility of a recession into account. But the Trump administration also hopes this will be part of the cleaning up process, and an unburdened and rebuilt US economy will thrive just in time for the 2026 midterm elections. It is a risky bet, but one that could pay off. While no likes recessions for obvious reasons, if done correctly, one can have a resetting effect comparable to “flushing out” inefficiencies in the system.
The goal of the tariffs appears to be reshoring industry. To put it differently, they are designed less to protect domestic industries than to bring in foreign industries. The United States is running high trade deficits with the rest of the world, particularly China and the European Union. Trump does not want to deprive his citizens of goods and services being imported from these countries, but to entice their companies to shift production to the US.
These capital investments, however, are long term bets for companies. German car manufacturers, for example, are expecting a loss of up to €8.2 billion or 29 per cent of their exports to the US. Manufacturers already in the US are already at 70 per cent capacity, and an expansion beyond that cannot be easily accomplished. The question, in other words, is not so much if, but when production can be moved to the United States.
Midterm elections are in 2026, and if the economy is in a recession, the Republicans could receive a serious shellacking. President Trump could be robbed of his much needed majority in Congress. Ironically, in the worst case, a Democrat-dominated Congress (and potential 2028 presidential candidate) could profit from the Trump plans. Apart from the ambitious timeframe, many of the proposals are indeed very attractive, for example, expediting the permitting process, or the massive pressure on oil and gas companies to increase supply and drive down energy prices.
The last one is particularly interesting, because the fossil fuel lobby is less than enthusiastic about Trump’s plans. “The comments in private that I heard were not of celebration. It is an industry that now is fearing lower economic growth and certainly… they are now very aware that the White House wants oil prices to go down perhaps as low as $50 a barrel and that is not very profitable for the American oil industry.”
Regardless of whether we agree or disagree with him, Donald Trump has decided to remake the entire US economy, and rebuild it on a solid footing of manufacturing and cheap energy. It will not take long for European companies to realise this. And the prospect of less bureaucracy and affordable energy could become an almost irresistible siren song.
If Volkswagen wants to compete with China in the EV sector, why not build factories in the US where the conditions could be exactly what the company needs in order to stay globally competitive? While it is true Berlin has opened its fiscal floodgates, it remains unclear whether or not the money will be used in a way to save Germany as a place to do business. Maybe all that money will disappear among lobby groups and to the usual Green boondoggles like “Green Steel”.
No renewable energy project will be able to outcompete $50 per barrel. Unless Berlin ends its commitment to wind and solar, and replaces it with nuclear and fracking, Trump might win the long game (even if he and his party should lose the next elections).
A smart European policy should aim at piggybacking on the ambitious plans of Washington, proposing far-reaching free trade agreement with the US while improving economic conditions at home.
The major EU economies are already operating under recession-like conditions. Which means there never was a better time to turn the ship around. Contrary to what it seems, the United States is not against cooperating with Europe, but against cooperating with a weak Europe. An economic area from the Pacific to the Baltics could lead to an economic revival—on both sides of the Atlantic.
This is of course precisely what Elon Musk has been suggesting, and we can hope he still has the president’s ear. |
Ralph Schoellhammer
