Europe must be prepared for Trump tariffs, European Central Bank chief warns

Europe must “be prepared” and anticipate the potential trade tariffs of newly inaugurated U.S. President Donald Trump, European Central Bank President Christine Lagarde told CNBC on Wednesday.

She said the fact that Trump had not imposed blanket tariffs on the first day of his presidency was a “very smart approach … because blanket tariffs are not necessarily giving you the results that you expect.”

As such, she said she expects Trump’s tariffs to be “more selective, focused.”

“What we need to do here in Europe is to be prepared, and anticipate what will happen in order to respond,” she told CNBC’s Karen Tso at the World Economic Forum in Davos.

Trump has threatened to impose duties on goods imported to the U.S. from the EU and has repeated these claims since his inauguration on Monday, telling reporters that the EU has been “very, very bad to us. So they’re going to be in for tariffs.”

Valdis Dombrovskis, the European Union’s commissioner for the economy, on Wednesday told CNBC that if the bloc’s economic interests needed to be defended, the EU would respond “in a proportionate way.”

There is widespread debate about the impact of the potential U.S. tariffs. Economists have said that the duties could hurt the economies that they are imposed onto, leading to fewer goods being exported to the U.S. Some have also warned that the U.S. economy could be affected as tariffs could result in higher inflation.

Trump has said that the tariffs would protect U.S. business and support his country’s economy.

The ECB’s Lagarde on Wednesday said that the theory of substitution — lowering imports from Europe in an effort to “beef up” manufacturing in the U.S. — was “questionable because the US economy […] is almost running hot at the moment.”

“If you look at the [U.S.] labor market, you have a very low unemployment rate. If you look at the capacity, it’s running almost at full capacity already. So that idea that you can manufacture what you will not import anymore, or that you will import at much higher prices, is… is something that will take a bit of time,” she said.

Importers likely also could not run businesses at low margins for an extended period of time, meaning that eventually “the buck passes to the consumer,” Lagarde added.

Lagarde separately also called for the removal of obstacles to trade within Europe, noting that despite aspirations to create a single market there were still barriers that at times prevented goods and services from travelling without impairment.

“I think it’s one of the points that Ursula von der Leyen, the president of the European Commission, made yesterday — let’s make sure that we remove the barriers over which we have control,” Lagarde said, without disclosing details.

Lagarde said she hoped this will happen in the coming weeks, describing it as “one way to respond to the change in the trade policy in the United States.”

“Be strong at home and make sure you transact, that you sell and purchase at home, that you save at home and that you invest at home. Not to say that we want to move into a protectionist approach, because what lower barriers has taught us is that trade is actually very helpful,” Lagarde added.

— CNBC’s Katrina Bishop contributed to this report.

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