Overview
US trading partners are nearing the end of the temporary reprieves from President Trump’s “Liberation Day” tariffs amid an increasingly complex geopolitical environment in which both the US and China are pushing trading partners to pick sides in the US-China trade war. However, for US trading partners, it remains unclear what the Trump administration is willing to do on the tariff front, if anything, in exchange for alignment on policy towards China. The results are strong incentives to hedge, with implications for the current system of alliances and global order.
European Union: Leading the Search for a Third Way
Europe is facing a new geopolitical reality of a shaky transatlantic relationship and growing evidence that the current US administration will not take into account European security and economic interests in formulating US foreign policy. The US is set on “unilateralism,” believing that it advances US interests more effectively than multilateralism.
President Trump’s determination that the Ukraine War is Europe’s problem, not America’s, associated policy changes to curtail US military assistance to Ukraine, and Secretary of Defense Hegseth’s no-show at the NATO-led meeting of defense ministers in April orchestrating military support to Ukraine all send a clear message that Europe is on its own. The outcome of the Ukraine War is no small matter for Europe, as it is viewed as central to the future of European security, the sanctity of post-World War II borders, and the effectiveness of deterrence against an expansionist Russia.
With Washington set on unilateralism and not vested in European security, the questions facing Brussels are what compromises will buy in Washington, and at what cost. There are limited expectations that a trade agreement will change US policy on Ukraine or views towards European security. But would greater alignment on China policy—a sort of aligned economic security club—unlock Washington’s willingness to compromise on tariffs, like getting to a zero-for-zero tariff deal on all industrial goods, which the Trump administration currently rejects?
Beijing is not sitting by quietly as Brussels—and other developed nations—negotiate with Washington. China’s move to restrict rare earth metals and permanent magnets was a power play to demonstrate that there will be high costs to countries aligning with US restrictive trade policies on China. Rare earth metals are required in the manufacturing of electric vehicles, chipmaking tools, military hardware, and medical equipment, i.e., they are critical to national and economic security and have become a pivotal element of global diplomacy.
European leaders are divided on the path forward. Some see Europe’s interests best served by reaching an arrangement with the US on tariffs and China, while others argue that the US and China both pose risks to European interests and that Brussels needs to diversify its partnerships to reduce dependencies. French President Macron, who has been advancing the concept of a “third way” for Europe for several years, spoke at the Shangri-La Dialogue on May 30 and called for an independent coalition between Europe and Asia to maintain strategic autonomy. He argued that the world is threatened by a global division between the two superpowers. Macron believes that an independent bloc could selectively cooperate and compete with the superpowers while continuing to advance the norms of the post-war international order to advance multilateral interests.
To a certain extent, Brussels is already doing this with China. The EU is keeping diplomatic channels open, engaging at a multitude of levels, all while adopting trade measures to protect against unfair Chinese trade practices, such as imposing tariffs on Chinese-made EVs in response to unfair government subsidies, and more recently, the EU is preparing countermeasures to stop the dumping of Chinese goods being diverted from the US due to steep US tariffs. Thus far, Europe has absorbed the pain of Chinese retaliation; now Brussels is preparing countermeasures against the US along the same lines, should they be needed. If US-EU relations continue to deteriorate, it is possible that European transatlanticists like Germany and Poland could embrace France’s call for increased autonomy.
On July 9, the EU faces the risk of US tariffs spiking to 50% absent a trade deal. Virtually all US trading partners subject to reciprocal tariffs also face the July 9 deadline to either finalize trade deals or experience increased tariffs. Steel and aluminum tariff increases from 25% to 50% have already gone into effect. If these country-specific reciprocal tariffs come into and remain in force, the shock to the global economy risks also jolting US trading partners into adopting new hedging strategies, possibly along the lines of Macron’s third way.
Geopolitical Realities Post-Tariffs
Hedging strategies risk fracturing the current alliance system and will have long-term impacts on how nations interact, with increased uncertainty and growing risks of conflict as the regional balance of powers shifts to adjust to superpower tensions. While a US-Europe break will be a strategic win for China, Chinese dominance is not pre-ordained. At some point, Russia is likely to push back against its growing dependency on China as Moscow seeks a return to superpower status.
The unintended consequences of the Trump trade policy risk a less secure US and Europe, in a new, structurally unstable multipolar world order. For businesses, the changing geopolitical context will translate into continued supply chain disruptions, shifting tariff and non-tariff trade barriers, increased costs to doing cross-border business, and heightened political risks to operations.
It is clearly in the interests of the US and major allies/trading partners to find common ground on trade terms. With US sovereign debt and the trade imbalance, there is a growing consensus among stakeholders in the US that the current path is not economically sustainable. The Trump administration’s miscalculation, however, may be trying to “fix” the trade imbalance all at once, when a phased approach could deliver the desired outcome without the accompanying economic shocks and upheaval in relations with major allies and partners. Rebuilding American manufacturing cannot happen overnight, given bottlenecks in the labor supply, skills, and experience needed for competitive manufacturing, and supply chains remain dependent on foreign inputs. The Trump administration needs to focus on building domestic capabilities, not risk disrupting foreign trade to address a top-line figure.
