European Central Bank (ECB) head Christine Lagarde urges Europe’s preparedness in anticipation of potential trade tariffs as newly inaugurated President Donald Trump aligns with America First Policy.
On Wednesday, January 22, Lagarde informed CNBC that Trump has yet to impose blanket tariffs on the first day of return to the White House. The ECB head indicated that failure to impose blanket tariffs was an innovative approach since such hardly yielded the desired results.
Lagarde indicated that she anticipated Trump tariffs to be more selective and focused. For this reason, she urges preparedness in Europe regarding what would happen to respond promptly.
Prepare for US Tariffs
Speaking to CNBC’s Karen Tso during the ongoing World Economic Forum (WEF) in Davos, the ECB president reflected on Trump’s promise to impose import tariffs.
In his campaign to become the 47th president, Donald Trump hinted at imposing tariffs on EU imports. Upon his inauguration, Trump repeated these claims, informing the reporters that the EU has disadvantaged the US, necessitating the tariffs.
The EU Commissioner for Economy, Valdis Dombrovskis, informed CNBC that the EU would uphold a proportionate response to defend the bloc’s economic interests.
The impact of the US tariffs has ignited widespread debate, particularly hurting exporters to the US. Economists consider the duties could adversely affect the economies that bear them. Such would lead to fewer exports to the US. Economists warn that tariff introduction could trigger higher inflation, thereby hurting the domestic economy.
Trump has repeatedly indicated that tariffs would shield the US businesses and the national economy.
During the Wednesday interview, the ECB’s Lagarde revealed that applying substitution theory, where you minimize imports from Europe to bolster US manufacturing, is questionable. The ECB head illustrated that since the US economy was entirely running hot.
Scrutiny in the US labor market shows low unemployment rates and running nearly at full capacity. She doubted the scenario where the US will manufacture what it does not import anymore or bear higher import prices would take time to actualize.
Lagarde decries threats to impose tariffs, indicating that importers are unlikely to put up with low margins for an extended period. Instead, the buck will ultimately pass on to the consumer.
Inevitable Response to US Trade Policy
Lagarde urged the bloc to embrace the proposal to eliminate obstacles hindering trade within Europe. Despite the aspirations to have a single market, barriers still exist that prevent the impaired flow of services and products.
Lagarde echoed the pronouncement of European Commission president Ursula von der Leyen urging the removal of barriers that the bloc has control over. The ECB president holds a comparable view that a proactive solution would shield the EU from catastrophic economic outcomes.
Lagarde hopes the bloc could adopt the strategy in the coming weeks, responding to anticipated changes in US trade policy.
Lagarde signed off by urging more substantial transactions at home during sale and purchase alongside investment is advisable. She clarified not advocating for a shift towards the protectionist approach since lower barriers are enough catalysts for helpful trade.
This alert was originally published on January 21, 2025, and updated on January 22, 2025, to reflect President Trump’s comments that additional 10% tariffs may be imposed on China on February 1.
America First Trade Policy
The outcry from Europe emerges from the recently issued memorandum by Trump on Monday directing the federal agency heads to prioritize domestic solutions.
The broad-based memorandum seeks to establish a robust trade policy prioritizing productivity and investment. Trump aims to reinvigorate trade policy to bolster national security and technological and industrial advantages. Besides defending the economy, the policy benefits American workers, entrepreneurs, businesses, and manufacturers.
While Trump has yet to announce new tariffs on imports, he indicated that such tariffs will soon target China, Mexico, and Canada. While he reiterated that imposing tariffs on the EU is possible, timing and duty rates remain unknown.
