Europe’s game plan for handling Trump at G7

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0:32Good morning from the Financial Times. Today is Thursday, June 12th. This is your FT News Briefing. The Trump administration is re-evaluating a key submarine deal. And the U.S. and China seem to be getting their trade relationship back on track. Plus, officials in Europe are going to see a lot of Donald Trump soon at the G7, at NATO, and at upcoming trade talks. What the Europeans are looking for is essentially calm, easy smiles through all three meetings. I'm Mark Filippino, and here's the news you need to start your day.

1:11The Trump administration is reviewing a 2021 submarine deal with the UK and Australia. The AUKUS pact between the three countries was signed in response to China's growing military capabilities. The goal is to give Australia access to nuclear-powered submarines. U.S. lawmakers and experts support the deal, but critics say AUKUS could undermine America's security. The U.S. Navy is already struggling to produce its own submarines. Sources say the review will determine whether to scrap the project. Ending the submarine and advanced technology development agreement could have devastating effects for U.S.

1:47relations with the U.K. and Australia. And the Deputy Secretary of State in the Biden administration said that undermining AUKUS would create a crisis in confidence.

2:02President Donald Trump said yesterday that the U.S. and China have agreed to a trade deal again. Officials from both sides spent the past few days locked down, hammering out the details in London. My colleague Peter Foster has been following along and is here to tell me about it. Hey, Peter. Hey. So talk to me about what these latest negotiations have been about. How did we get to this point of having to hold marathon talks? Yeah. So these last two days of talks in London were trying to nail down, to operationalize a deal that everybody thought had been agreed in Geneva back on May the 12th. But both sides then accused each other of reneging on the deal.

2:41And essentially, the deal involves the Chinese front-loading some of these rare earth metals that are used in all of our advanced manufacturing, which they have a stranglehold on. And in exchange, the US would loosen controls on exports of chips, but would also stop cancelling visas of Chinese students. But between that May 12th deal in Geneva, where the tariffs got down to 30 % from 145%, the two sides fell out. So what you saw in London this week was an effort to try and patch up their differences, which they seem to have done. Yeah. Tell me about what exactly was resolved when they patched up their differences.

3:20Do we know what the US and China agreed to after these London talks? Well, we know bits of it. Reading between the lines, we think the Chinese have agreed to stop being so restrictive on rare earth metal exports and rare earth magnet exports. So over the last few weeks, we've seen supply chains in both Europe and the States really struggle for a lack of these rare earth magnets that go into everything from medical devices to auto parts and engines, electric motors, et cetera. Washing machines, yeah. Washing machines, indeed. And the Chinese who process 90-odd percent of this and have a near monopoly on the mining of these rare earth metals, this is the first time talking to industry that they've really started to use it.

4:07And that squeeze forced everybody to the table. Now, a bit that we don't know is what other concessions the US has made, particularly on controls over chip exports, which, of course, the previous Trump administration, but also the Biden administration introduced to stop the Chinese getting the hold of these latest NVIDIA AI chips and other very high-end chips. It'll be really interesting to see what concessions in that department the administration has made. And we should just mention that Donald Trump posted on Truth Social yesterday saying that he's approved the deal, and it's just now up to President Xi Jinping in China to approve the deal.

4:47And at the time we're recording that, we still haven't heard from President Xi. Is there anything that could derail this, Peter? Lots of things. I mean, this is the nature of the U.S.-China relationship now. I think it's fundamentally abrasive. It won't take much for both sides to accuse the other of reneging on the deal, which is, of course, is the process that we've just been through. And then, of course, remember the 90-day pause that the administration introduced runs out in August, if I have my math correct. So there are more things to be done between now and then to stabilize the tariff regime.

5:2330 % talking to Chinese manufacturers is really at the limit of what makes exports from China into the U.S. profitable. And we've seen cargo from China into the West Coast of America absolutely fall off a cliff. It's coming back now. But I think certainly on the Chinese side, they'd like to get those tariffs down. Peter Foster is the FT's World Trade Editor. Thanks so much, Peter. My pleasure.

5:53Now, U.S. inflation isn't really getting hit by Trump's trade war, at least for now. Figures released yesterday show the Consumer Price Index rose to 2.4 % last month. That's just a hair below what analysts expected, and just a tenth of a percent higher from April. But inflation is expected to rise more in the next several months. Economists say that it usually takes a while for retailers to pass on cost increases to consumers, and yesterday's report was only the second one since Trump unveiled his tariffs in April. The Federal Reserve is preparing for this potential rise in inflation down the road, and the central bank is expected to keep rates steady when it meets next week.

6:40Europe's relationship with the Trump administration is facing several big tests in the coming weeks. The first is this weekend's G7 summit in Canada. A week later, NATO leaders will meet in The Hague. A day after that, EU leaders will huddle for a summit in Brussels to try and figure out a trade deal with the US. I'm joined by the FT's Henry Foy to discuss all of this. Hey, Henry. Hey, Mark. All right, so let's just take each meeting separately. First, this week's G7 summit. What are the Europeans hoping to achieve here? Yeah, that's right. The summit gets underway on Sunday or running to Monday and Tuesday.

7:16and essentially this is the first real test of how does Donald Trump like this big multilateral thing? Is he going to be a team player on the G7? G7 traditionally has looked at economic areas, trade, finance. This is somewhere where they're going to really see up close and personal how Trump's dealing with these other six key Western allies. He now is, of course, threatening all of them with potential tariffs. The second point is that Ukraine's President Vladimir Zelensky will be there. This will be a real test, if you like, of what Trump really thinks about the Russia-Ukraine peace efforts. So it's a real kind of a litmus test for Trump's approach to those two key issues.

7:59What about at the NATO summit a week later? I have to imagine that Ukraine's going to come up there too. You would think so, but actually not. It's not going to be the primary focus for the first time in three years, the NATO summit is all going to be about money. This is really the moment where the other 31 allies turn up and empty their pockets on the table figuratively and literally and say to Donald Trump, look, we're going to spend loads more money. This is how fast we're going to spend it. And ultimately, we're going to hit your big fat 5 % of GDP defense spending target that you laid down.

8:29The flip side, the one they're really worried about is Trump turning up and saying, I don't trust you. And we're going to start pulling troops and capabilities out of Europe. Okay, so this one has to do with money. The next one has to do with money too, right? Because the tariff talks are still going on. These are maybe the most important to Trump and also probably, I would say, the most complicated to solve. So where are the Europeans and the Americans on these talks? At the moment, we're seeing not a lot of progress, certainly on the EU-US trade deal. There's been a number of bilateral visits by European leaders to try to get Trump to reach some kind of compromise.

9:05All we know at the moment is that if there isn't a deal by July 9th, he will impose 50 % tariffs on EU imports. So the EU leaders will come together on Thursday, the 26th of June, as you said, straight after the NATO summit, a huge amount on the line. This is the European economy that could be really under huge strain if these tariffs do come in as threatened. So yeah, defense, security, Ukraine, which is all about territorial integrity and sovereignty, and then trade all really up for grabs in the next month. Yeah, it sounds like they're going to be seeing a lot of Trump. And I'm wondering, what is possibly the worst case scenario here for the Europeans?

9:42And how are they going about avoiding it? I mean, the worst case scenario, Mark, is that Trump sees all three of these things as one great big bargain. This is Trump. He loves to strike a deal. And he is going to want to extract as many concessions from them on all three. The Europeans are saying, no, these are separate issues. The worst case scenario is he gets upset in Canada by what he sees as potential pressure on him about Ukraine. And that then spills into NATO where he turns up on the bad foot. He gets upset in that meeting. He feels that these spending promises aren't going far enough.

10:12Here's this massive tariff wall I'm going to erect around the US for EU goods. And then the Europeans lose out on all three. So to answer your question directly, what the Europeans are looking for is essentially calm, easy smiles through all three meetings to make sure that Trump walks away thinking that the Europeans are doing his bidding, they're on his side, and there's no need to punish them with a massive trade war. Henry Foy is the FT's Brussels bureau chief. Thanks so much, Henry. Cheers, Mark.

10:44You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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12:04Enjoy.