The equation crafted by Trump’s team carries a two-pronged message that mirrors the president’s own thinking—blunt and stripped of nuance. The equation carries both a threat and a suggestion to negotiate—typical Trump: pressure upfront, negotiation as the fallback.
Expressed in mundane terms, the equation says:
Negotiation
Threat
Notice that Trump’s team set the trade elasticity at 0.25—but then multiplied it by four. In reality, short-run trade elasticity is closer to 1, and Trump’s team knows this. Letting trade elasticity to tariffs “take its course” effectively assumes a value of 1, which would (theoretically) reduce the U.S. trade deficit in goods with the EU to around 10% by the end of the mandate. Notice also that such a deficit in goods would match the size of the U.S. surplus in services (see graph below), resulting in a zeroed trade balance.
We analyzed how trade responds to tariff changes, focusing on trade elasticity, which refers to the responsiveness of trade volume to changes in tariff rates. Elasticity varies by product type and evolves over time. From the EU’s perspective, the potential impact ranges from €100 billion in the short run to €300 billion in the long run—roughly 1-2% of EU GDP, representing a significant shift.
Trade elasticity discussions often focus only on demand, on the buyer’s reaction, but in reality, supply elasticity, the seller’s adaptation, matters just as much. The final outcome depends on which side adjusts faster and more effectively.
Our estimates for the EU hinge on a big assumption—that the U.S. adapts. But adaptation, a core idea in Trump’s thinking (i.e., importing less), seems unlikely.
More importantly, the damage to European trust is already done.
In reality, there are two trade elasticities at play.
The elasticity of the importing country—the U.S., in this case—reflects how quickly and to what extent the U.S. will adapt to living without imported EU products. If, as Trump believes, the U.S. can easily find domestic substitutes, demand elasticity will be high, and EU exports will drop significantly in the long run. Conversely, if the U.S. struggles to replace EU products, the drop in EU exports may be smaller.
As for the seller, the European Union, its trade elasticity reflects how quickly and effectively it can adapt by finding new markets, adjusting production, or absorbing the tariff costs to stay competitive. If the EU can easily shift its exports elsewhere, its supply elasticity will be high, and the impact on the EU may be lower. If the EU struggles to find alternative buyers, the long-term damage could be worse.
The outcomes may be one of three:
-
If both the EU and the U.S. adapt, the original trade relationship might even vanish.
-
If only one side adapts faster than the other, the slower side will suffer.
-
If neither side adapts well, trade may continue at a reduced level, but both sides will suffer inefficiencies.
Loss of the European Trust
China reacts to Trump´s Tariffs announcing that from April 10, 2025, all imported goods originating in the United States will be subject to an additional tariff rate of 34% on top of the current applicable tariff rate.
For SOAPBOX readers, hardly a surprise — see our weekly issue three weeks ago.
Alliances are often shaped by limited trust or even mutual animosity between potential partners. The outcomes depend not just on who joins forces with whom, but also on the strength—or weakness—of each bilateral relationship.
Long before John Nash introduced his famous concept of equilibrium in strategic decision-making—where no player can benefit by changing their strategy alone— the Frenchman Condorcet studied how preferences play out in pairwise decisions. He observed that sometimes, rather than producing a clear winner, preferences form a eternal loop—what we now call a Condorcet cycle. In such cases, there’s no stable best choice.
It’s a bit like the game of rock-paper-scissors: each option beats one and loses to another, with no single dominant strategy.
The EU no doubt observes that its one-on-one relations with both China and the U.S. (the key pairs) are in a fluid and unstable state. Often, when this happens, the approach is to:
Go with convenience Temporarily choose the least unstable option—and trust it won’t turn to ashes too quickly.
Be ready to pivot In such situations, cooperation is by definition fragile. The EU may need to recalculate frequently as circumstances shift.
Accept the Condorcet loop Sometimes, there is no perfect move. Every choice comes with a downside, and the EU must learn to live with the cycle.
While the EU must avoid burning bridges, perhaps the best path forward is to be more EU than ever—embracing its distinct identity and acting with strategic clarity, not less of it.
Out of the €5 billion drop in EU auto exports to China in 2024, Germany accounts for €4 billion of the decrease.
The five tech giants combined have installed more than 14 GW of solar capacity. For comparison, Spain, considered a major player in solar energy, has reached nearly 32 GW by the end of 2024.
We doubt the EU will overlook the combined services exports to the EU from these five companies, as well as from Netflix and others.
Starting April 1, 2025, road hauliers will be required to submit data on goods shipped to or through the EU before their arrival, through a complete Entry Summary Declaration.
This obligation will also apply to postal and express carriers, as well as other parties such as logistics providers, involved in transporting goods using these modes of transport.
Around 2010, forecasts suggested that China would consume roughly 50 million cases of the world’s wine production. This sparked concerns that global production wouldn’t be enough if China became a nation of wine enthusiasts. That never materialized.
By 2024, China’s wine consumption is barely 20 million cases, and even when including bulk wines, the total reaches only about 30 million cases.
In response, the European Commission is now proposing financial support for winegrowers who voluntarily reduce their grape yields. This policy aims to better match production with the ongoing lower demand, helping to prevent further price declines.
China’s Trade Remedies Bureau cites case complexity as it extends the EU brandy probe deadline to July 5, 2025—its second delay in recent months. The move reinforces suspicions that the investigation is a calculated retaliation, with China pressuring France and the EU for leverage in broader disputes.
In the meantime, China’s imports of cognac and similar spirits from France drop 75% year-on-year in Jan-Feb 2025
In 2024, the auto sector accounted for more than 22% of China’s exports to Russia which were $115 billion. However, exports in early 2025 have plunged sharply
Without the government trade-in programs, retail sales growth in 2023 would have been just 0.7%
Expected news, as we mentioned in our previous issue from March 31st.
In 2024, China’s e-commerce platforms shipped to the U.S. the equivalent of nearly $23 billion, accounting for 4.3% of China’s exports to the United States. The growth in this category was 25% compared to 2023. However, by early 2025, the growth rate had tumbled, dropping to a mere 2.3%.
Ship exports are set to surpass $50 billion in 2025, driven in part by Ro-Ro vessels ordered by Chinese electric vehicle companies, which will later be flagged under convenience flags in other locations
We are committed to sharing with you the best trade analysis we have to offer.
If you would like to share something with us, feel free to comment in the section below or drop us a line at [email protected]