Trump's economic warfare: doubling down ahead?

The first Bureau conversation after the summer break took the form of a free-flowing economic tour d´horizon. Inevitably, the discussion centred around the actions of the US administration both domestically and in the international arena, and the risk of Donald Trump doubling down in economic warfare in the months and years ahead.

Regarding US internal economic warfare, now a key Trump administration priority seems to be for the Fed to substantially cut interest rates to reduce the costs of servicing US government debt. Trump’s actions to politicise the Fed by intimidating and eventually changing its leadership (including by trying to remove Federal Reserve Governor Lisa Cook “for cause”) are aiming to bend monetary and regulatory policy to the president’s will. This attack on the independence of the Fed may actually deliver some of the intended outcomes in the short run. But it is profoundly dangerous for the Fed’s credibility, threatening a bedrock of US economic stability and global economic leadership. History teaches us that over the medium- to long-term chaos usually follows when political leaders capture their central banks and force them to buy government debt and/or to engage in monetary repression. Inflation expectations could quickly become unmoored; the dollar’s standing as the world’s reserve currency would be further weakened, and confidence in Treasury securities which are widely regarded as the world’s safest asset could be undermined. Thus, ironically, the autocratic power grab could misfire and result in higher long-term interest rates, higher inflation and increased output volatility. Participants suggested the global demand for alternatives will further increase when US policies are reducing the relative liquidity and safety of dollar assets. Thus, the euro area must make ready to absorb large capital inflows. However, several participants were seriously concerned that in such a scenario materialising when faced with inconvenient facts and evidence, the Trump administration may well be inclined to simply “double down” employing even more aggressive instruments of economic coercion both domestically and in the international arena. Revenge taxes and capital controls, anyone?

Doubling down may also occur on the tariffs’ battleground. Initially, Trump targeted the United States’ closest trade partners, Canada and Mexico. Then, on “Liberation Day,” April 2, 2025, he took his trade war to the world and announced “reciprocal” tariffs against all countries worldwide. However, he soon walked back on many of these measures in response to threatening reactions from the US bond markets. Eventually, after a chaotic period of back-and-forth a clearer picture of Trump’s tariff settings has emerged. On May 8, 2025, a trade deal with the United Kingdom was announced. One of the few countries with a trade deficit vis-à-vis the US, the UK will nevertheless face a 10% import tariff when exporting to the American market. On July 23, 2025, the White House announced a 15% tariff agreement for imports from Japan. China is currently facing a 30% tariff on exports to the US. Then, on July 27, at Trump's luxury golf course in western Scotland, a similar 15% tariff deal for imports from the European Union was agreed upon with European Commission President Ursula von der Leyen. While many details remain unclear, it appears that the 15% rate applies to key goods such as cars, pharmaceuticals, and semiconductors. The deal also includes EU investments in the US, as well as increased EU purchases of energy and defence products from the US.

A US appeals court has just recently ruled that most tariffs issued by Trump are illegal, but the court also said that the tariffs can remain in effect for now, paving the way for a showdown at the Supreme Court. Despite the many uncertainties, participants in the Bureau debate agreed that the tariffs “are here to stay” causing significant disruptions in export-driven economies like China and several EU Member States. Still, most participants shared Jason Furman’s view that “Trump’s tariffs leave us in the second worst of all worlds”, in the sense that the settlements at least avoided a full-on trade war of escalating tariffs on all sides; thus, many of the angry criticisms of unconditional surrender rather reflect misguided mercantilist views. However, many were concerned that we “ain’t seen nothing yet” should Trump come to the belief, rightly or wrongly, that the EU fails to deliver on its commitments. Opinions varied on the EU's bargaining power, but most agreed Europe is in a weak position given current geopolitics and Russia’s ongoing military aggression against Ukraine.

The chairman concluded that the risk of the Trump administration doubling down in economic warfare is certainly non-negligible; in particular, he called to prepare for turmoil in international financial markets and a possible "weaponization" of swap lines by a Trump-controlled Fed. The ECB and euro area governments should coordinate with other third nations on pooling of dollar reserves for swap lines near-term and nudge systemic financial institutions away from dollar funding over the medium term. Managing financial stability risks will also have to include avoiding reckless pursuit of cryptocurrency investors, developing a central bank–issued digital euro, and above all maintaining high supervisory standards. In any case, the EU must rise to the challenges posed by the new geopolitical realities and urgently do its own pending homework.