What Europe’s response to a no-deal with Trump could look like Clutch Fire

Brussels is preparing for a no-deal scenario as uncertainty persists about if and when a trade agreement between the European Union and U.S. will materialize.

Lawmakers on Thursday signed off on a major package of counter-tariffs which would target a wide range of goods and discussions are reportedly ongoing about deploying the EU’s so-called “trade bazooka.”

Measures could kick in soon as there are just a few days left before Aug. 1, after which EU imports to the U.S. are set to be slapped with 30% tariffs and the EU is expected to respond promptly.

Talks of a potential deal have however also been heating up this week, with sources telling CNBC that the current base-case scenario for a deal includes a 15% tariff on EU imports to the U.S. Any possible exemptions are still being worked out, they noted.

But crucially, much depends on U.S. President Donald Trump, who is known for last minute changes of heart and quick decision making. There are therefore no guarantees about what a potential deal could look like.

This week the European Commission combined two packages of proposed duties into one list, which totals tariffs on 93 billion euros ($109 billion) of a wide range of goods from food and drink items to clothing and machinery.

A source told CNBC earlier this week that tariffs could be as high as 30%, mirroring those from the U.S.

EU member states reportedly on Thursday voted to approve the combined list. The measures are set to come into effect just days after the U.S.’ Aug. 1 deadline.

Carsten Brzeski, global head of macro at ING, told CNBC on Friday that he expects tariff-level retaliation from the EU in the absence of a deal.

“In a non-deal scenario without another delay of US tariffs, I see the EU going for a tit-for-tat approach, ie imposing 30% tariffs on selected US goods, not yet all goods, like the well-known motorcycles, cars, clothing and alcohol,” he said in emailed comments.

“Given that European countries are not fully aligned on how to react, I cannot see the EU going full in but rather trying to find a balance between showing that it reacts but without going beyond the US measures,” Brzeski added.

Another widely discussed option is the EU’s so-called anti-coercion instrument, which has been referred to as a “trade bazooka.”

The measure is designed to be a deterrent, with the European Commission saying it would “be most successful if there is no need to use it.” But if a third country does engage in coercion, “the instrument allows the Union to formally identify instances of economic coercion and to respond.”

The bloc views economic coercion as interference from non-EU countries in the region’s policies by threatening or imposing measures that impact trade and investment.

While the European Commission notes that dialogue and engagement would be part of their response to such coercion, the ACI for example, also allows for import and export curbs and restrictions on accessing the EU’s market.

The EU may be able to impose export restrictions regardless of whether it deploys its anti-coercion instrument, said ING’s Brzeski.

Alberto Rizzi, policy fellow at the European Council on Foreign Relations, told CNBC on Friday that even though the ACI is considered the ‘nuclear option,’ “in reality there is room for flexibility in its application, as long as the retaliatory measures remain proportionate to the harm of the coercion.”

Rizzi suggested that despite the mood across the EU shifting to become more confrontational and supportive of “swift and substantial” retaliation in a no-deal scenario, it is uncertain when the ACI could be activated.

“Retaliation is seen as a negotiating tool by the EU, so the ACI will probably be activated only in a second phase if there is no response by the US after the tariff packages enters into force — the EU would want to keep it as leverage rather than using it immediately,” he said.

— CNBC’s Silvia Amaro contributed to this story.