Barry Eichengreen: Trump’s trade offensive echoes Thatcher’s Falklands War

The Heard and McDonald Islands, populated only by penguins, were understandably supine. But it is more than a little surprising that so many others have taken US aggression lying down.

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The European Commission’s agreement with the US is especially stunning. It has accepted Trump’s 15% baseline tariff, with exemptions only for aircraft parts, critical minerals and a couple of other items. US duties on steel, copper and aluminium remain at 50%. European Commission President Ursula von der Leyen has pledged that Europe will buy additional US energy and invest $600 billion in the US.

In return, the EU receives basically nothing, only a US promise not to impose still higher tariffs, at least for now. Moreover, the deal enhances US exporters’ access to European markets, while Europe’s exporters face additional barriers in the US.

The outcome is widely seen as a sign of the EU’s weakness. The Commission had to negotiate an agreement on behalf of 27 countries with different positions on how aggressively Europe should respond. In France, there was considerable support for the idea that it was important to face down a bully. In Germany, by contrast, policy was shaped by automotive and machinery industries desperate to retain access to the US market on terms at least not grossly inferior to those obtained by Japan, South Korea and the UK. These differences left the Commission with little wiggle room.

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Then there is the fact that the EU continues to rely on the US for weaponry and that it needs America’s help in supporting Ukraine.

Europe likewise lacks a pressure point analogous to China’s control of rare earth refining, which allows the Chinese government to threaten retaliation by cutting off an essential input required by US high-tech industries and by the country’s defence complex.

Finally, like other economies contemplating how to respond, Europe faces a ‘madman’ problem. Normally, the strongest argument for retaliating is to deter further aggression. A rational leader will understand that launching a trade war, much like launching a conventional war, will provoke a counter-attack in which his country suffers as much as his opponent’s. But then, this strategy works only when leaders are rational. Trump’s trade-policy decisions are clearly guided by an irrational belief in tariffs—“the most beautiful word in the dictionary," as he puts it—and by the perverse satisfaction he derives from punishing opponents and even allies, regardless of the costs borne by the US itself. Negotiators, not only in Europe, had good reason to fear that Trump would meet retaliation with retaliation, resulting in further damage.

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There is, however, a contrary view that Europe has shown strength, not weakness. Meeting tariffs with tariffs, especially when these have no deterrent effect, is simply a way of shooting oneself in the economic foot. Higher import prices fuel inflation and thus hurt consumers, while taxing imported inputs, as the US is doing, makes domestic production more costly and less efficient. At the same time, less import competition encourages rent seeking: domestic producers will lobby for tariff concessions and make campaign contributions to obtain them.

Thus, Europe has shown its wisdom in shunning self-destructive measures. It now needs to follow up by ratifying its free trade agreement with Latin America’s Mercosur bloc, solidifying its trade relations with China and recommitting itself to the multilateral trading system, whether the US participates or not.

Something else that Trump’s trade war and Thatcher’s Falklands War have in common is their utility in distracting attention from their instigators’ domestic problems—in Thatcher’s case an unemployment crisis and in Trump’s the questions about his ties with the convicted paedophile Jeffrey Epstein, who hanged himself while awaiting trial on federal sex-trafficking charges.

Helped by her victory in the South Atlantic, Margaret Thatcher would reign for eight more years. The US Constitution prevents Trump from serving as president until 2033. Or so we are led to believe. ©2025/Project Syndicate

The author is professor of economics and political science at the University of California, Berkeley, and the author, most recently, of ‘In Defense of Public Debt’