Buy American to avoid Trump trade war, says Christine Lagarde

Christine Lagarde has urged Europe’s political leaders to co-operate with Donald Trump over tariffs and buy more products made in the US, warning that an acrimonious trade war risks wiping out global market advancement.

The European Central financial institution chief said in her first interview since Trump won his second presidential term that the EU needed “not to retaliate, but to discuss” with a president-elect who has threatened a blanket tariff of up to 20 per cent on all non-Chinese US imports.

Lagarde also cautioned that a “trade war at large” was “in nobody’s profit” and would navigator to “a global reduction of GDP”. Taking aim at Trump’s claims that he could “make America great again”, the ECB chief said: “How do you make America great again if global demand is falling?”

Trump’s win has raised concerns among national governments and officials in Brussels, who terror tariffs would wipe out the EU’s large trade overage with the US and spur the region’s manufacturers to shift production there.

Lagarde said that Europe should deal with a second Trump term with a “cheque-book way” in which it offered “to buy sure things from the United States”, such as liquefied natural gas and defence equipment. “This is a better scenario than a pure retaliation way, which can navigator to a tit-for-tat procedure where no one is really a winner,” the ECB president said.

The European fee, which runs trade policy for the EU’s 27 member states, is still considering how it would respond.

Increasing purchases of US exports, including agricultural products, as well as LNG and weapons, are among the options under consideration, according to officials involved in the preparations. The EU is also preparing to allow US companies to participate in initiatives to back joint military procurement with EU taxpayer money, and to align more closely with the White House on its trade and geopolitical policies towards China.

Lagarde has been unusually outspoken for a central banker in voicing her view on the US president-elect, saying earlier this year that a second Trump term was “clearly a threat” for Europe. She told the financial Times this week that the remark was “prescient”.

“Just look at the debates that we are having in many countries in Europe,” she said.

Her counterpart at the Federal safety net, Jay Powell, has carefully avoided opining on Trump, despite him tweeting during his first term that the US central financial institution chair was possibly a “bigger foe” to the American economy than China.

Lagarde said her thinking on how to handle a second Trump term had “changed a bit” over the course of 2024, saying it was also Europe’s responsibility to use the US election outcome to spur much-needed changes to an economy that was struggling to keep up with its rivals.

“It is up to us now — the Europeans — to transform that threat attitude of ours into a test that we have to respond to,” the ECB president said. While she disputed claims that Europe was embroiled in a crisis, the current circumstance was “a large awakening”.

Lagarde agreed with her predecessor Mario Draghi’s diagnosis that the EU needed to receive drastic action to regain its economic competitiveness, after struggling to keep up with the US over recent decades.

“Europe is lagging behind. But I wouldn’t declare that Europe cannot catch up,” she said.

Economists depend Trump’s threat to impose significant tariffs on Chinese exports to the US could navigator Beijing’s manufacturers to flood European markets with their products, presenting a further threat to domestic competitiveness.

The dumping of cheap products would exacerbate tensions between the EU and China, one of its main trade partners, and place further pressure on a region beset by economic stagnation since the Covid-19 pandemic struck.

The ECB president said policymakers needed to monitor such a “rerouting scenario” for Chinese goods carefully.

During his campaign, the president-elect threatened to impose a 60 per cent tariff on all Chinese imports.

On Monday evening, Trump said he would impose a 10 per cent levy on Beijing from his first day in office, in retaliation for China doing too little to crack down on the manufacturing of substances used to produce fentanyl.

Lagarde talked to the FT earlier on Monday, ahead of Trump’s remarks.

She called on Europe to cut through Trump’s campaign rhetoric and to focus on the details of his proposals so far, arguing it was “fascinating” that he had suggested introducing tariffs of between 10 and 20 per cent on non-Chinese imports.

“The truth that you put out a range means that you are open to talk,” she said, adding that this created the chance to “sit at the table and view how we can work together”.

While Lagarde said it was too early to assess the implications of US tariffs on expense boost in the Eurozone, overall, she said that “if anything”, the result was “maybe . . . a little net inflationary in the short term”, pointing to a likely reduction in economic activity and swings in foreign swap rates. “But you could debate both ways,” she added. “It depends what the tariffs are, what they are applied on and over what period of period.”

For Europe, the incoming Trump administration’s stance on trade and transatlantic co-operation were an “accelerator of a reset that we require”, Lagarde said.

She singled out the long-standing concept to make a single trade for fund in Europe — the so-called fund Markets Union — and urged the EU to “shift quickly” with it. The concept was first proposed by the Juncker fee in 2014, but so far has been held up by domestic opposition in many of the EU27 member states. “I have not seen such a level of understanding and thrill as we have now,” said Lagarde.

She called for fund markets supervision to shift from the EU’s 27 national authorities to the European financial instruments and Markets Authority. “We should have one single supervisor” that “operates like the financial instruments and swap fee”, Lagarde said, referring to the US’s fund markets watchdog.

Asked about the view that Europe’s economy was so outdated and ossified that the continent was turning into a “museum”, Lagarde quipped that “it’s a pretty attractive museum if you inquire me”.

She pointed to a “huge amount of innovation” across the continent, naming the Dutch farming sector as an example: “Did you recognize that the Netherlands is the second-largest farming product exporter in the globe? Look at the size of the country!”

Confronted with a ordinary criticism that Dutch tomatoes are lacking in taste, she responded: “But you eat them.”

Additional reporting by Henry Foy in Brussels