Donald Trump’s decision to extend the EU’s exemption from punitive steel tariffs until June 1 has left Europe’s leaders with a lot to think about as the clock starts ticking down yet again to a trade war.

The US and EU have now gone to the brink twice over the tariffs, only for hostilities to be postponed by Mr Trump at the last minute. The brinkmanship is far from over. Washington is determined to keep the pressure on Brussels, and the EU has not tired of pointing out that it is ready to retaliate against everything from US peanut butter to bourbon should it not be granted a permanent reprieve.

On the positive side, the outcome was not as bad for the EU as had been feared only hours before. When Germany and France’s economy ministers met with Cecilia Malmstrom, the EU trade chief, on Monday, the mood was downbeat, with little hope that the EU would secure any further carve out, according to officials.

In any event, Mr Trump’s decision on Monday evening means that Europe has 30 more days to convince the US not to apply the 25 per cent tariff on steel and 10 per cent tariff on aluminium, which were announced by the US in March as a national security measure.

But it is a reprieve that has also left the EU with a quandary.

Ms Malmstrom and leaders, including France’s Emmanuel Macron, have emphasised that the EU will never grant concessions to secure a permanent exemption from tariffs they consider to be illegal.

Europe has instead stuck to a line that any trade talks must be of mutual benefit, and can only come once the US drops the tariff threat. But that strategy has so far failed to secure the permanent carve out that the EU craves.

For André Sapir, senior fellow at the Bruegel think-tank in Brussels, it is vital for the EU to resist any “quid pro quo” for dropping the tariff threat. Ceding ground would simply invite further US demands, he said: “you put your finger in something and then what’s next.”

But the EU does not want a trade war either: Berlin, for one thing, is fearful of a US attack on its car industry and is emphasising that the EU needs to find a suitable way to address Washington’s concerns.

One idea mooted in Berlin and other national capitals is for a trade negotiation on industrial goods that would be broader than Mr Trump’s fixation on cars but narrower than the sweeping — and stalled — trade deal that Brussels and the Obama administration worked on.

But EU officials caution that this is not a simple solution: any talks would have to be wide enough to give Europe the opportunity to get some wins and so ensure a balanced deal.

The European Commission has also ruled out trade agreements with countries, such as the US under Mr Trump, that reject the Paris climate change agreement. This principle is a pillar of Mr Macron’s trade strategy.

The challenge for the EU is to do everything possible to avoid a trade war, short of being bullied into fighting one.

Bluffer’s guide to the MFF numbers

It’s EU budget day in Brussels. Every seven years the commission unveils its quixotic vision for common spending, setting off one of the scrappiest diplomatic fights the town ever has to endure. The Multiannual Financial Framework (MFF) numbers are still in flux ahead of Wednesday’s meeting of the commission’s college. But as of Tuesday this was the state of play:

The size
The FT’s Alex Barker reports that Brussels is seeking to increase the seven-year EU budget to approximately €1.25tn. The existing budget is €1,087bn in current prices. That rises to around €1,130bn for 2021-2027 (in 2018 prices). After adjusting for inflation, the overall cap on commitments is approximately €1,280bn. That’s the big headline number.

One budget, many ceilings
The MFF has more ceilings than sense. The existing commitments ceiling (what the EU can plan to spend) is 1.03 per cent of EU gross national income. Günther Oettinger, the EU’s budget commissioner, said this needs to rise to 1.1X for the EU27 after Brexit.

The proposal looks like it will be at the lower end of the range: 1.11 per cent of GNI. But there will be off-budget elements that could bring it to 1.14.

The payments cap
The limit on what the EU can actually spend, however, is different. The payments ceiling is set at a lower level: 1.08 per cent of GNI. That still above the existing 0.98 per cent. But not as big a jump as some net-contributors feared. (They may still be upset though).

Not another one
The final cap is on what the EU can raise from member states if necessary. This “own resources ceiling” will rise from 1.2 to 1.29 per cent. It’s important because the buffer between payments and this maximum cap helps sustain the EU’s credit rating — and its lending power for things like the new eurozone stabilisation facility.

Who’s up/down
There are seven headings for this budget and in rough terms: Innovation & Digital (UP); Cohesion & Values (DOWN); Natural Resources & Environment (DOWN for agriculture/fish, UP for climate); Migration & Border Management (UP); Security & Defence (UP); Neighbourhood & World (FLAT); Administration (FLAT).

Not only Britain enjoyed a “correction” to adjust for an “excessive” level of contributions. There were rebates for Germany, Austria, Sweden, the Netherlands and Denmark as well. The commission originally wanted to scrap the whole system. But it has softened the plan and will phase out the discounts instead, probably over 5 years.

Winners & Losers
That will take a while to work out. The big headline cuts are to agriculture funding and cohesion policy, which seeks to reduce the development gap across Europe. But both policies are being reformed at the same time. That makes it harder to make like-for-like comparisons with existing arrangements.

Until the details of the highly-sensitive criteria allocating cohesion funds is unveiled later this month (there is big battle over that), country-by-country net positions are also hard to estimate. But the underlying funding shift looks like it is from east to south. Some central and eastern European countries are nervous.

Want to know more?
The FT has covered: the ruthless tactics to negotiate an MFF; the stricter powers to cut off funds to countries where judicial independence is threatened; the “frugal four” who are standing in the way of a bigger budget; the eurozone fund to deal with economic shocks; the raid on European Central Bank profits; the plans to reform how cohesion funds are allocated; the Brexit black hole; and the 34-year old system of rebates.

Twitter: @jimbrunsden

Get alerts on EU trade when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article