Did Europe Just Surrender to Trump?

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1:02David McWilliams: To understand the economy, you have to understand human nature. This podcast is powered by Acast. How are you doing there? It is time for the podcast. The podcast today will be a hot take on the most recent news that the European Union has in effect rolled over its game set and match to Trump on the trade tariff negotiations. Headline news is that the United States will have unfettered access to the European Union, while in contrast, the European Union will pay 15 % tariffs on all European goods going to the United States. And we have yet to see what is in store for the pharmaceutical industry, which is of particular importance to both Ireland, but also to France and to Denmark with large pharmaceutical sectors.

1:56David McWilliams: So, John, is it a deal or no deal? Well, is it a good deal or a bad deal, more like? That's lovely theme music. I love the theme music there. Where did you dig that out from? That takes you right back to your daytime TV days, huh? Do not knock daytime television, John. As you know, I was, in my many incarnations, I once was an afternoon I was a daytime television presenter show called The Big Bite maybe our audience was slightly niche it was the elderly and really stoned students watched it you were sitting there in your lovely flex suit exactly my flex suit doing all sorts of things I was so mad we had about 8 topics a day so you could be talking to some minister and then talking to some guy who just transitioned about his journey and then some pets and some, was there a bit of cooking?

2:48There's always cooking in those afternoon shows.

2:50David McWilliams: Of course there was. Yeah, yeah, yeah. Listen, John, we might go back there. It is called, it's the Shumterian Adaptability, John. Oh, right. Actually, you decide, okay, this is my gig for the year. This is how I'm going to pay the rent. And away you go. Anyway, let us get back to the game. That show never exported to the US though, unfortunately. No, somehow. Well, there would have been a tariff on it. Exactly. on the intellectual property of David McWilliams' afternoon chat show. Afternoon chat show, 2-4, RTE, early 2000s. Anyway, where were we? We are on Trump. So the headline numbers are, as I said, John, it looks as if the European Union has been rolled by Trump, number one.

3:34David McWilliams: Yeah. Okay? The question then is, and this is always the question, Is there some incredibly mendacious European tactic here, which gives Mr. Trump a victory and the Europeans live to fight another day? Because the Europeans know is that at the moment, America is the dominant power. At the moment, America is the dominant party. Europe needs more than anything else needs time. And sometimes in a crisis, as we've said before, what you run out of is time. But time for what, though? Europe needs time to reconstruct the entire industry, to rebalance its economy. First of all, let's think about what the European strengths, right?

4:22David McWilliams: Despite the Americans yabbering on about the Europeans being weak, etc., it is Europe that runs a$200 billion trade surplus with America, not the other way around, okay? That is the fact. This is the issue, right? The issue is the European$200 billion trade surplus with America. That's the first thing. So typically, the country that runs the trade surplus or the entity is the stronger one. What the Americans have seen is this is a sign of European cheating and criminal behavior and not having a level playing field. What the Europeans have said is, okay, we will give you the victory and Donald Trump can go home and do a, not even a victorious lap, maybe two victory laps, okay?

5:07David McWilliams: And then the European hope is he kind of goes away, that he's happy with that. He pockets the victory. He goes on Fox. He tells everybody how great he is. Europe basically realizes, okay, the tariffs are 15%. American consumers are going to pay that. Is it really going to move the needle as the American to say on reversing the trade imbalance that isn't Europe's favour? Maybe not. And more importantly, we live to fight another day. That is the idea. So, you know, for example, people have said the Europeans have folded. But from my understanding in poker, you fold when you weigh up all the risks and you're not prepared to deploy more capital in the gamble and spoof.

5:55That's when you fold. when you realize, actually, you know what? Right now, we don't have the hand. And you give up whatever was on the table that you put on the table, yeah.

6:04David McWilliams: Right. What you don't do is double down on a bad hand or hit the nuclear option, which is the cold-blown trade war. I'm going to spin it in a way in which I'm trying to see if there's a European angle in this. Yeah. So is this the old Kenny Rogers approach to tariff negotiations? know when to hold them, know when to fold them. Exactly. Know when to walk away and know when to run. As they always say in poker, you've got five minutes to figure out in the game of poker who the fucking Egypt is. And if you haven't figured that out after five minutes, the fucking Egypt is you. So anyway, speaking of which, though, Trump clearly played poker.

6:46David McWilliams: And I think what's interesting is the way in which the Europeans came to the table was they came as diplomats, right? They came as legates. They went to America. They spoke for 100 hours with the American negotiations. I'll actually just give you the background before we talk about the issue. So Trump gets in in January. Well, he gets in in November, but they're waiting for January. They're waiting around. They're thinking, will he be as bad? Is the bark going to be worse than the bite? Let's see. then I think the European negotiators were taken by surprise on Independence Day. Even though they probably shouldn't have been, they were.

7:22And then they hoped that, oh, look, what's happened? The financial markets have reacted very, very badly. Trump always chickens out. Taco, we're going to adopt that sort of strategy. Now, what actually happened behind the scenes was that in as late as late June, which is not that long ago, John, The European negotiators and the American trade negotiators had come to a standoff, but an honorable standoff of 10 % tariffs each. And they were going to put that on the table. Both sides were going to say, OK, that's fine. The Americans get some revenue. Because remember, this is not just about the 200 billion trade surplus that Europe runs with the United States, which America thinks is unfair.

8:09It's also about the idea, the central idea in MAGA, that they will raise revenue from the tariffs and they will go back to the William McKinley economics of raising revenue from tariffs. So what they were hoping was that the Americans could go away and say, look, we've got a revenue deal here and we brought the Europeans to the table. Actually, what happened was Lutnik brought that back to Trump and Trump exploded and said, no way. So this is a Trumpian deal. So the trade negotiators brought back what they would regard as an honorable settlement. But Trump, ever this sort of New York real estate guy, wanted to crush the opposition.

8:52Now he understood, remember we mentioned last week, this is the key thing, that the Europeans have a weakness. It's the weakness is the Europeans can be seen in the European Union as a chain. And the weakest link in the chain is the way in which different European countries regard their relationship with the United States. Yeah. So for the Americans, Europe is one block. That's why Americans say when they go on holidays, I went to Europe. Yeah, yeah, yeah. They think it's one place. For the Europeans, every single country has its own relationship with the United States. And every country has their own particular industry that they're trying to protect to a certain degree.

9:39So the first thing you said before we get that, you're absolutely right. But before we get to that, what we have is the difference between a street fighter and a diplomat. The Europeans go as diplomats expecting a sort of a deal between governments that is honorable, that is respectful and that seeks to reinstate the status quo. Yeah. Donny J doesn't look at the world like that. He looks at the world through the prism of what's the next headline going to be? Can I crush the opposition? Can I humiliate the opposition? Can I walk away as the big guy? And of course, this is why he took even the likes of Lutnik and said, no, your deal isn't good enough.

10:23And he wanted to get an all or nothing deal, right? So that's the first thing. That's on the American side. From the European side, is there a European cleverness here? which is, this is not as bad as it seems. The last thing we want is all-out war. I'll put it to you in the Michael Collins pro and anti-treaty version. Right, okay. To appeal to Irish people. This is in Irish history.

10:46David McWilliams: This is exactly the deal that the 1921 Anglo-Irish Agreement, right, which established the bona fides of this state and the settlement to start this state. Michael Collins goes to London. De Valera wants a full 32-county republic or nothing else, the nuclear option. Lloyd George says to Michael Collins, if you want that, we're not going to give it to you and we're going to restart the War of Independence and we are going to destroy you. So Collins is faced with the Armageddon or the Free State. Yeah. The 26-county Free State Dominion status. Collins thinks it's better to get a little bit in the deal, clear the air, sign the deal, and what he called have the freedom to negotiate your own freedom rather than go from Armageddon, which everything could be blown apart, the De Valera approach, right?

11:41Maybe von der Leyen and the European Commission and working together with European capitals are in the Michael Collins thing, which is, this is a disastrous situation if it goes wrong. But the problem was, though, that that deal sparked a civil war. Exactly. Exactly. And I want to get to this as well, because the civil war analogy also works here. So, but the idea is that, you know, when you're negotiating with Donald Trump in a crisis, which is of his making, the decisions you take are never between good and bad. They're always between bad and worse. Yeah, yeah, yeah. Okay. So what's the worst thing?

12:19The worst thing for the European Union was to face a full-blown trade war with America. Why? Because we're winning. We are the ones with the trade surplus. Yeah. Don't tell Donny that. Maybe it's better to accept a halfway house, which looks like a visceral defeat. It looks like a climb down. It looks like game set and match to Donny. But what it is, is the opportunity to buy yourself a little bit more time, to think on your feet, to get behind closed doors, etc., etc., etc.

12:52David McWilliams: So this is the way I'm looking at it. It's not because if you look at the commentary, the commentary is, oh, it's a European defeat and they're stupid. That's taking the world as a zero-sum game. If you win, I lose. And if I win, you lose. But we know that's not how the world of trade works. The world of trade is much more subtle. It's much more flexible. And it lends itself to long-term thinking rather than short-term thinking. So that's my take on it, which is the European Union, divided as it is, bureaucratic as it is, probably dodged a serious bullet here. Yeah, I was wondering that, you know, when you're using that analogy of Irish independence and the Civil War and all the rest, did von der Leyen go with this deal in order to keep Europe together?

13:44Interesting point. So you're getting to something very interesting here. So at the core of the European Union, the conflict at the core of the European Union has always been between sovereignty and supra-sovereignty, between nationalism and internationalism, between the sovereignty of the nations, which has always been driven by the Council of Ministers, and between the Federalists, which has always been driven by the Commission.

14:14David McWilliams: And this is an ongoing tug of war at the heart of the European Union. This is something that I think many Brexit commentators didn't understand, that the European Union isn't a finished article. It is a set of compromises between national politicians and parliaments and the federalists, right? And it's always been this, it'll ever be this. Why? Because Europeans are at their core still nationalist. Germans are Germans, French are French, Italians are Italians. And so what we have here is von der Leyen and her commission officials realizing that they were pushing up against the extent of commission power.

15:04Now, interestingly as well, lots of people have framed this as sort of the Brexit negotiations mark two, right? That it was the same commission team broadly representing the commission. That same commission team had screwed the British negotiators and really didn't give an inch. And the perception was they would try and do the same thing with the Americans because they were starting from a stronger position, as in we're the ones with the trade surplus. But I think what happened in Brexit, and this is very interesting, Brexit threatened the very integrity of the European Union. Because if Britain was seen to get a good deal and prosper afterwards, it would act as an incentive to other nationalists around Europe to break away.

15:55So it was seen as a red, red line for the European Union. The British need to be seen to suffer. And as a result, the European Commission went full on hardball and all the European capitals came in behind them. So that idea, John, that you said that at the top that every European country has a different relationship with America because they have different sectors, that didn't apply in Brexit. then it was simply, listen, Britain needs to be punished, not because it needs to be punished, but because it can't necessarily be the leader of a movement against Europe. With America, it's quite a different idea.

16:37It's quite a different idea. And with America, the relationship that has been forged between various different member states with the United States, which is historical, which is political, which is military, and we're going to come on to that in a second, John, it's much bigger. So I think that what happened was the hardcore commission team wanted to play, from what I know, and what I've made a few calls from people who studied with me in the College of Europe last night, who are part of the negotiating team for the commission. What I gathered from then, John, was that the commission wanted to go hard, but they came up against the council and the interests of the member states.

17:19Germany, France, even Ireland, even Ireland, all lobbied hard for a de-escalation of the trade war. Whereas the commission or certain parts of the commission wanted a re-escalation. And basically von der Leyen ceded to the power of the nations rather than the power of the Federalists. So I think that's going on behind the scenes. But why was that? Why were the commission so keen to de-escalate and vice versa? Because remember that we talked before about this, suppose a big bazooka. Yeah, that's typical commission. It didn't exist, right? It was a bluff. But why the commission were hardcore is because the commission really do not represent the nation states.

18:12at its core has a different agenda. And its agenda is to supplant nation-state power with Federalist power. That's what the Commission's all about. I knew this from my time in Brussels. It was never said because it sounds too sort of Jacobin almost, but it's the case. And so here what we have, I think, is the European Commission. These trade negotiations with the Americans have shone a light on how Europe really works. And it's back to the fudges, the compromises. You know, so you have been no doubt that while the European Commission was going in one way, the Germans were talking to the French, they were talking to the Italians behind the backs of the Commission and trying to find a reasonable position.

19:00And you know what? Given that Donny wanted an all-out trade war or 100 % tariffs or 50 % tariffs or whatever, you know, the stuff he's been throwing out for the last two or three months. You know, 15 % tariffs on European goods is probably not a bad result when you're running a trade surplus of 200 billion per year. So, you know, since Trump has come in in January, the world has been thrown into this kind of chaos and uncertainty. So does this trade deal, does that mean that we're in more certain times and then we can just get on with our business.

19:39David McWilliams: And this is where I'm going with this podcast, right? European financial markets have reacted amazingly, positively to this deal. Because they're thinking, okay, that's it. It's done. It's done and dusted. We know it's all over, right? And they're reacting that a lot of the uncertainty has lifted. But, you know, with Trump, you have no idea what's going to happen. But I do think that this could mark a moment, and we're going to come on in the second half of this podcast, John to talk about Ireland specifically but I think this could mark a moment where there is now some sort of sense of a deal that is some sort of sense of permanence and we live to fight another day yeah look at that sort of idea it's the it's the great idea in military tactics that you withdraw in order to basically preserve your army or your resources to reimagine what the future might be and to try and take it from there.

20:34And I think that's what the Europeans have done. This may well be a charitable explanation, but I think it's a good explanation for what they have done. And it's the only explanation that makes any sense to me, which is the Commission have been defeated by the national and sectoral interests and Europe kind of goes one step backwards to go sideways, to maybe go one step forward again in the next five or six years. But Mike, the little bit that I was reading since I was woken very early this morning by you. Yes.

21:08David McWilliams: Dear listener, dear listener, you have to understand that the insomniac McWilliams has these bright ideas in the middle of the night and is trying to text John like a jilted lover. Get up, get up. Let's record this podcast. John's like, oh, man, it's Monday morning. Give me a break. So I was. Go for it, John. Yes, I was, yeah, just flicking through the headlines of the deal. But the two things that stand out, obviously, were energy, American energy, and American armaments. So Europe has effectively secured its energy and its military needs. So does this put Russia on the back foot? What does it mean for Russia?

21:49Very good question. So what we've noticed about Donald Trump has got a street and an alley cat's sense of weaknesses and strengths. He understood that internally the main weakness for the European negotiators were the fact that nation states had different interests to the commission itself. So member states had different issues. So we've got Germany cars, French have booze, Irish have pharma, la la la, right? But the other huge issue, John, is that Europe needs American military hardware to fight the Russians in Ukraine. So what Trump understands is that dangling in front of the Europeans is the explicit or maybe implicit threat that the Americans will just walk away from Europe.

22:38That is a huge, huge, huge negotiating chip that the Americans deployed over the last five or six days. And so what the Americans have got out of this is, as you said, an energy deal which undertakes on the part of Europe to buy more energy from the Americans. That's LPG in the main. America is, as we know, a big energy exporter, and American arms. And again, I talk about the live to fight another day. Europe probably needs American arms now at this moment because its own armament industry hasn't been rebuilt in the way it wants. So again, if I were to look at this strategically, I think what European gives away is something that already needed, which was American guns and American energy.

23:30and that allows Donald Trump to go back with a victory to the American people, American Congress. But if you're looking at this as a medium-term play, it's not as bad as the newspapers are highlighting. And again, the reason the new places are highlighting this because newspapers are editorially on one side or the other. So this comes down to the role of Russia. Russia still looms large. Russia is still the enemy. Russia is still the threat. After this deal, the Europeans probably will be more in the pocket of the Americans for the short term, which is what they want it to be, and not necessarily dependent on Mr.

24:10Putin for energy, which they never really wanted to be at all. so what I'm saying is the role of Russia is it would have been dangled in front of the European negotiators the big threat was America pulls out if you don't give us this deal again you weigh up the pros and cons of this you're probably thinking to yourself you know what this isn't such a bad deal for the Europeans at all because remember Europe has the financial firepower to do the deal And if over time the Americans reduce the trade surplus that Europe has with the Americans, that's not the end of the world. They'll raise about$30 billion a year directly from this for tariffs, which is not significant in the context of what the Americans said, that they would raise a trillion dollars from tariffs.

25:05They're now going to raise$30 billion, which is 3 % of the trillion, which is hardly a great victory. But they're spinning like hell. So I think an interesting way to look at all this, John, in the round is the Europeans probably snatched a tiny, tiny victory from the potential jaws of defeat by giving Donny a opportunity to brag at home. but by actually protecting themselves from a trade war, number one, or from the worst Lutnik-esque or Trump-esque fantasies of not just a trade war, but crushing the Europeans as they keep talking about. Can I ask you then, before we talk about Ireland, just very briefly, is there anything in the trade deal that prevents Europe from pursuing more trade with the likes of China?

26:05No, and that's interesting. That's a good thing then. It is a good thing because remember, in the British trade deal, the Americans made conditional that certain British firms couldn't trade with certain Chinese firms in certain sectors. Yeah. So they haven't done that. And that's something that the European Union negotiators, in fairness to them, probably, probably, not so much got away with, but actually held a line on. So that's very important. It also, as you say, you've said, you know, diverting European trade away from America is probably now the European major. For, again, the live the fight another day analogy, we will now divert our trade away from the United States towards China.

26:50That leads us, John, to the country that can't divert its trade away from the United States at the moment, which is Ireland. Yeah, well, absolutely. That was going to be my next question. what does it mean for Ireland? But let's take that up after the break.

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29:22So deal or no deal, Mac, we did a deal. And as you say, it's probably dodging a bullet and we live to fight another day. But what does it actually mean for Ireland? Because we're a little bit more exposed with the pharmaceuticals. And to date, we're getting away with the 15%. Is that likely to change? and what does the overall deal mean for Ireland? Okay, so just so you put in context, listeners, you're probably reading the press about this. The overwhelming reaction to the press is, this is Europeans' defeat, Europeans are stupid, the European Commission is a patsy, yadda yadda yadda. What we're offering here on the podcast is to look at it a little bit more nuanced and from the perspective that trade deals are not all or nothing.

30:14they tend typically to be about what can you get for now? Do you live to fight another day? Does it give you time to reassemble your resources, et cetera, et cetera? So that's the take I'm taking. It's not the mainstream take, but there you have it. I wouldn't expect anything less, Mac.

30:35David McWilliams: Air it off, Johnny. But for Ireland, the spin coming out of Ireland is the following, right? Which is that the trade deal is awful. It's not free trade. It's very far away from free trade and this is terrible. But we are quite relieved to have a deal and to, in some way, draw a line on the uncertainty, right? The free trade argument was lost as soon as Donald Trump came into power, right? So there's no point in talking about that. That's the old world. That's not the new world. I would say that in Ireland, there is a sigh of relief, except for the fact that pharma has been excluded from this deal.

31:15And Donald Trump has been very explicit that he wants American drugs to be made in America. And he sees this not as really a financial play, but as a geostrategic security play. What the Americans were really terrified during the pandemic was the fact that they didn't have their own drugs to actually fix their own population. Not only that, they didn't have their own. Do you remember during the pandemic, the Americans didn't even have their own kit? They were buying the kit. PPE stuff. The Chinese. Yes, exactly. So that really freaked out the Americans, as it should do as a superpower. You know, you don't really, you don't want to be dependent on other countries for drugs, etc.

31:58So I think the drug thing is geostrategic, almost defensive, as well as just financial. So they're saying we're going to come back to pharmaceuticals. I would say the pharmaceutical deal will be worse than 15%. I would say that there is going to be a migration of pharma, jobs, income, and capital out of Ireland. I think that that is the big hole. And I think Ireland would have been hoping for an all-encompassing deal that got everything last night or over the weekend. That didn't happen. So I think that is a significant problem for one sector. but that sector is particularly influential in Cork from the jobs perspective, which is the pharma center of Ireland, number one.

32:49And number two, it's obviously very significant from a tax perspective. All of which, John, reinforces what we were saying in the last podcast is we have to get our own shit together and have our own companies and not be completely dependent on the United States. So let's watch this space. This is the one downside. The upside is all the other foreign multinationals, be they services or manufacturing, be they healthcare, health products, engineering products, tech products, etc. All of those now have a deal. And that is a huge, huge positive for Ireland because it means that we now know that the 15 % is the new dispensation.

33:33Will that be worse than 0 %? Obviously. But is it considerably better than a 50, 60, 100 % that Trump was talking about? Absolutely, yes. It will also be welcomed in corporate America boardrooms as, okay, now we know the cost of doing business in Ireland. Now we know the cost of doing business with the Europeans. Let's see. Do we invest more? Do we invest less? Do we split our investment? So I would say that if this deal sticks and if the United States is good for the signature at the end of the piece of paper, then I think what we're looking at is an end to the uncertainty in almost every sector with the exception of pharma.

34:20and that will spur, I think, investment back into Ireland if that's what we need, although we've argued before that maybe we have too much investment and we can actually slow things down. But I think that in general, this is not a bad day for the economic model of the Republic of Ireland, which rests on not so much free trade, but at least some sort of logical, predictable trade model with the United States. And I think that's what we've got. Might change tomorrow, though. If Trump doesn't do the deal,

34:57David McWilliams: if Trump decides that he wants to go back to the drawing board. But, you know, what I think he'll do is he'll pocket the victory. He will take the victory lap and he will move on. and the Europeans will understand this as a bullet having been dodged just about and will take the view, you know what, we have bought ourselves a little bit of time here and a little bit of time is exactly what we wanted and they've got it. So both sides, when the newspaper editorials have moved on and start writing about something else, Both sides will feel that they didn't do too badly at all out of what could have been a total catastrophe.

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