'Globalization Without the U.S.'...Standing Together Around the EU [Economic Insight]

The most significant issue that shook the global economy in the first half of this year was the imposition of tariffs by the United States under the second Trump administration. So far, only the United Kingdom, Vietnam, and Indonesia have concluded tariff negotiations. The European Union (EU), while keeping the door open for negotiations, is preparing a dual-response strategy that includes retaliatory tariffs and export controls. Japan has even held a summit, but has not achieved the desired results.

The United States under Trump is dismantling the very foundation of “continuous expansion of free trade” that it had established since World War II. The administration is disregarding the economic principle that “free trade benefits all trading partners,” and seems unconcerned about warnings of economic recession and inflation.

Currently, it is only the United States that is weaponizing tariffs and undermining free trade. Other countries wish to maintain the existing rules-based order of free trade. In that case, the rest of the world could simply continue to expand free trade and globalization without the United States. However, since the United States occupies such a large share of the global trade market, the impact is inevitable. Still, if the United States insists on this course, there is little that can be done.

The EU is at the forefront of this trend. The EU is discussing short-term joint responses and seeking long-term structural changes in trade with U.S. allies and trading partners that are facing the threat of U.S. tariffs. Since the U.S. announced reciprocal tariffs in April this year, the EU has been working to establish new trade agreements and strengthen existing ones.

Ursula von der Leyen, President of the European Commission, and Prabowo Subianto, President of Indonesia, announced at a press conference on the 13th that they had reached a political agreement to advance a free trade agreement (FTA). The EU has also begun official FTA negotiations with the United Arab Emirates (UAE).

On June 26, President von der Leyen proposed establishing a new free trade system to replace the World Trade Organization (WTO), and stated that both sides hope for “structured cooperation” between the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU. The CPTPP is a multilateral free trade agreement launched in 2018 by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, with the United Kingdom joining in December last year. The EU is also working to build closer trade relations with India, South Africa, and several countries in South America and Asia.

Other countries are also striving to reduce their dependence on the United States. Canada is seeking greater access to Southeast Asia, while Brazil and Mexico are deepening their mutual trade relations.

South Korea must do its best in negotiations until the tariff suspension ends on August 1. However, as Yeo Han-koo, head of trade negotiations, mentioned on July 14, no one can predict what will happen after August 1, and the country must prepare for the worst-case scenario while striving for the best possible outcome. In the first half of this year, South Korea’s exports to the United States and China decreased by 3.7% and 4.6%, respectively, due to the impact of the U.S. tariff war. However, exports to the EU (up 3.8%), ASEAN (up 3.8%), and the Middle East (up 3.3%) increased, resulting in overall exports remaining nearly flat at -0.03%. Exports to India rose by 1.6%, marking a record high for the first half. This demonstrates that expanding trade with countries other than the United States could provide a breakthrough.

In addition, companies around the world that export to the United States should raise their product prices by the amount of the imposed tariffs. While some may increase local production within the United States, that would play into Trump’s intentions. To demonstrate the dangers of “tariff-induced inflation,” which Trump ignores, exporters should pass the tariffs directly onto the prices of their products.

Inflation will increase the cost of living and provoke public discontent among Americans. Furthermore, inflation will delay the “interest rate cuts” that Trump desires, and the amount paid in U.S. Treasury bond interest will remain high. If this happens, perhaps Trump, known as “Trump Always Chickens Out” (TACO), will once again back down.