In a trade War, Europe Can Deal a Historic Blow to the US

By Dr John Hulsman and Dr Boris N.Liedtke

“This is so dumb. Europe, Canada, and Mexico are not China, and you don’t treat allies the same way as opponents.”

–Senator Ben Sasse, Republican from Nebraska, regarding President Trump’s Trade strategy

 The vast majority of economic theorists would agree that in a trade war the economies as a whole in all the countries involved lose out. Their conclusion is, despite sunny and fantastical claims by the Trump White House to the contrary, that a trade war is not winnable. But this should only be where discussion on the administration’s bellicose trade policy towards its allies—the EU, Canada, and Mexico—begins, not ends.

For the key is to think broader than the trade relationship between two countries. The Trump administration, in its gormless overconfidence, has just handed a potential historic victory to its allies in Europe and Canada – as long as these countries are willing to accept the new reality of a Trump presidency, the multipolar world we now live in, and boldly go where they did not dare go before.

Donald Trump’s negotiation style has been highly predictable and consistent throughout his business career as well as since assuming the presidency. It can be summarised by two main pillars which are common knowledge among professional negotiators: first adopt an early anchor strategy, and second know and exploit the counterparty’s BRA (Best Realistic Alternative). The former simply means to be the first in a negotiation to claim a position highly favourable to yourself, thereby forcing the other party to start negotiating away from their core position.

The second negotiating gambit is to analyse what the counterparty’s best realistic alternative is if a deal is not struck. Once this is known, you are then willing to marginally move from the anchor towards inside a settlement area that is better for the counterparty than no deal at all. The only way to counter this strategy is by walking temporarily away from the offered deal, find a better realistic alternative or improve on one’s position. When that is done, the trick is to re-engage with the other party by throwing out your own anchor.

Moving from theory to reality, Trump has just thrown out his anchor in trade negotiations with Canada, Europe and Mexico by unilaterally imposing tariffs on steel and aluminium. The knee jerk reaction of these countries is to counter this with their own punitive tariffs and then seek negotiations hoping to settle somewhere within their best realistic alternative, but probably relatively close to what the Trump administration will be hoping for. Consumers in both countries will face higher prices; jobs on both sides of the Atlantic will be lost and economic theorists will be proven right – no one wins a trade war.

But this unimaginative policy would also mean missing a historic opportunity which the US has just blindly, foolishly, handed to Europe. If the European countries and the EU have the imagination and the will to see President Trump’s unforced error, they can seize on his glaring mistake as a game changer in global politics itself, or at least at a minimum as a substantially improved Best Realistic Alternative in future talks with the US.

In 1823, then Secretary of State John Quincy Adams formulated the Monroe Doctrine, which has been the bedrock of US foreign policy ever since. In essence, it claims that “as a principle in which the rights and interests of the United States are involved, that the American continents, by the free and independent condition which they have assumed and maintain, are henceforth not to be considered as subjects for colonization by any European powers.” America boldly declared that the Western Hemisphere was exclusively an American sphere of influence, and that European (and any other) powers were to be kept out.

Mexico and Canada, as America’s immediate neighbours, have benefitted from the Doctrine through improved national security and trade but have also seen their foreign policy options severely restricted. But the foundation for the continued relevance of the Doctrine have been rapidly corroding during the Tump presidency. The president has called into question both the military commitment it offers its allies and has now moved to challenge the economic benefits of free trade with its closest neighbours, who are amongst its most important trading partners. Institutionally, NATO has been questioned and NAFTA is outright being blown apart. Europe needs to react to these calamities and step out of the shadows of a regional power to assume its role as a global player.

And the time is ripe for the EU to pounce. Undoubtedly, Canada in many ways finds itself a ‘European’ country marooned on the North America continent, in terms of its cultural, political and economic mores. Among foreign policy circles it is frequently joked that Canada would feel more at home if it would be situated between Belgium and the Netherlands, yet geography has errantly placed it north of the United States.

While Canada can’t do much about its geography, President Trump has nevertheless opened the door for a bold strike to shift Canada back to the sphere of influence of Europe – reversing the Monroe doctrine. Instead of playing tit-for-tat on trade with a negotiator like Donald Trump, the European Union could change the game entirely, offering Canada the opportunity to apply for a fast track admission to the European trade block, joining as a full member at the earliest possible opportunity. Lost trade relationships between Canada and the USA would be quickly replaced with access to an even larger consumer market in Europe, and on far more common cultural trading terms. Geo-strategically, Europe, instead of losing global influence through Brexit, would gain a foothold on another continent.

Scepticism about Europe being capable of expanding to the Americas should be put to rest by looking at recent history. During the 1990s and 2000s, the European Union moved eastwards to include former Communist countries, which were and in some cases remain further removed Brussels than are the rule-of-law-loving Canadians.

The audacious invitation to Canada to apply for membership in the European Union—triggered by America’s feckless declaration of a trade war on its own allies–would inevitably trigger an anguished, overdue, and fundamental foreign policy discussion in Washington about what it would mean to have the European Union on its northern border. As NAFTA inevitably breaks up—due to a combination of the Trump administration’s unrealistic demands on Mexico, and its likely July election of leftist firebrand Andreas Manuel Lopez Obrador as president–it is conceivable that America’s southern neighbour might even seek to join this alliance over time. Geo-strategically, the world would be truly turned upside down, heralding the birth of the new multipolar era.

Even at a minimum, such an initiative would have substantially shifted the Best Realistic Alternative trade strategy in any future negotiations with the US. Instead of seeing themselves as vassal states depending on the US for its defence, foreign, and trade policy – Canada, Mexico and Europe–would sit down with the US as negotiating equals, letting Donald Trump know that the alternative to sensible trade positions between the allies of the Cold War is an absolutely ruinous policy of geopolitical isolation, with the US finding itself surrounded by the European Union on its own continent.

Donald Trump is succeeding in singlehandedly taking an axe to the old international order. However, with geopolitical creativity and will, a new and better one can still emerge from the ashes.

–Dr. John C. Hulsman is President and Managing Partner of John C. Hulsman Enterprises, a prominent global political-risk consulting firm. His new book, To Dare More Boldly: The Audacious Story of Political Risk, was published by Princeton University Press in April and is available on Amazon. He lives in Milan, Italy.

–Dr. Boris N. Liedtke is the Distinguished Executive Fellow at INSEAD Emerging Markets Institute and has over twenty years’ experience in the financial sector. He was the CEO of the largest bank by assets in Luxemburg and board member for Operations at the largest German fund manager. He is author of numerous articles on finance and trade as well as having received his PhD from the London School of Economics for the publication of “Embracing a Dictatorship” by MacMillan.

Published in the European Financial Review, June 6, 2018.