How Should Europe and China React to the Trump Shock

The Trump administration will only retreat when the pain is large for the U.S. ruling class.

Guancha.cn: What’s your take on the tariffs Trump imposed on over 180 countries globally? What is his motivation or objects?
Yanis Varoufakis: The objects of the Trump administration? Very clear. I’m not saying that they are right. What I’m saying is that they are very clear. His team has publicized them in extensive papers. What Donald Trump says to the media is quite separate from the real motivation. The real motivation, to summarize it is, on the one hand, to reduce the value of the dollar, to devalue the dollar by around 30%, because that will, in their view, rebalance American trade with the rest of the world, would reduce their inputs from places like China and Europe, and it will increase the export.

But the difficulty is how to combine this reduction value of the dollar without losing the dominance of the US dollar internationally. For that, they need to persuade friends and competitors, whether it is the Germans or Japanese, or the Chinese, they need to be persuaded to use their very large ocean of dollars that they have saved from selling to the United States in ways that do not undermine the dominant position of the dollar. So, for instance, the Trump administration has tried to convince the Japanese to use the 1.2 trillion dollars extensively in order to purchase very long-dated American government debt, or to buy stable coins or bitcoin, to buy anything other than the Chinese one, or the European one, or the Japanese one. So they slap the tariffs to begin with, and then in one-on-one negotiations with different countries separately, or economic blocs, they would try to extract that.

On April 16, Ryosei Akazawa, the Japanese trade negotiator, met with Trump at the White House.

This is not the first time this has happened. In 1985, the Ronald Reagan administration, in the so-called Plaza Accords, did that to the Japanese. Essentially, they said to the Japanese, either you increase the value of the yen in relation to the dollar, or we’re going to impose 20%-30% tariffs on Japanese exports to the United States. And the Japanese immediately acquired the immediate silence. But China is not Japan, and what Trump is attempting is global in its reach. So that that is, that is the motivation behind what the Trump administration is doing.

Guancha.cn: I know you teach economics at the university. Trump weaponized tariffs against China, which at one point triggered turmoil in the U.S. capital markets: stock markets plunged and Treasury yields spiked. At the time, Trump also tried to persuade the public that the current economic pain was necessary for America’s long-term interests.
My question is: how credible do you think this claim — that “short-term pain is for long-term gain” — actually is? Can weaponizing tariffs really solve America’s problems?

Yanis Varoufakis: We have to wait and see if it is a credible threat. I have no doubt that it is a valuable threat. Allow me to make one correction. This is not just to contain China. This is an attempt to effectively blow up the monetary and trade system that the United States imposed after 1971, to recalibrate it wholly, not just in relation to China, but also in relation to the European Union. Remember, the European Union has a trade service, more or less, not as large as China’s, but not far off 200 billion euros a year. The same applies to Japan. And we need to compare what Trump is doing with what Richard Nixon did in 1971. Because that was another interesting occasion when the United States destroyed the system it had created, the Bretton Woods system(1944-1971). When the Americans destroyed it, they destroyed it in a way that had enormous costs in the United States.

So this idea that they’re inflicting even upon themselves a major cost in order to gain the perpetuation of American hegemony, this is what Nixon succeeded in doing. American interests suffered a lot in the 1970s as a result of the Nixon shock. But the Nixon Shock was calibrated. So while it inflicted serious costs on America, the costs to Germany and Japan would be greater, and therefore, the competitiveness of American industry would improve. And it was also based on the assumption that, well, what can German or Japanese capitalists do with the dollars that they collect from the US? They will have to bring it back to the United States. So in the end, they won, but at the expense of the majority of Americans. The majority of Americans never recovered from the Nixon Shock.

So we should never consider this as America versus China or America versus the European Union. This is an attempt by the ruling class of the United States to maintain their own power and to enhance their own hegemony. And if that means serious costs in relation to even the American people, they are prepared to take it. So my message to my Chinese friends is not to mistakenly believe that if the pain in America is too large, then the Trump administration is going to go back, it’s going to retreat. No, it will only retreat if the pain is large for the ruling class of the United States. That’s what everything depends on in the final analysis.

China is thinking many moves ahead in a chess game, but the European Unions only think one move ahead.

Guancha.cn: We’re also very interested in the Europeans’ response. The EU imposed retaliatory tariffs on U.S. steel and aluminum. How would you assess Europe’s retaliatory actions? Do you think Trump’s global trade war will strengthen internal unity within Europe, or will it deepen the rift in the transatlantic alliance with the United States?

Yanis Varoufakis: I think it is useful to compare the European Union’s reaction with China’s reaction. I think it’s very interesting, because on the one hand, Europe and China are in the similar situation: both China and European Union have hundreds of thousands of millions of dollars of trade surpluses with the United States, which means that both China and European Union cannot win a trade war against the United States. Because if you’re running a trade surplus with someone and there is a tariff war, you will lose. I mean, the Americans may feel the pain, but you will lose, because tariffs only work for the country that is in deficit, not for the country that is in surplus. So that is the similarity between the European Union and China.

The other similarity between the European Union and China is based on the end of globalization, the recycling mechanism that has been functioning since the 1970s. Chinese factories, German factories, and Japanese factories produced things to export to the United States. And the Chinese, the Japanese, and the German companies got back with dollars. Then they invested in American Treasuries, American real estate, and so on. That system of global growth is finished, and it will not be reversed even if Donald Trump is overthrown, loses the presidency, and a Democrat comes in. I think that we need to understand that this is a new phase in the post war global pattern.

So both the EU and China have to balance their own columns. It is very simple. China can no longer rely on 300, 350, 400, whatever, billion dollars worth of net experts to the United States. It’s clear that the government machine knows it. The same apply to European Union. The European Union must also understand that they cannot really rely anymore on net experts. So there has to be the balance.

Now, there are two ways to rebalance. One is to go into a serious, steep recession which no one wants. The other is to elevate your own consumption of those things that you were exporting in the United States within your own economic bloc. So it is clear to me that China is working in the direction of this rebalancing act. It is working in the direction of investing more in AI-driven technologies in Chinese industry, elevating the living standards of the working class, creating a better social security system. This is what China is doing. Europe is not doing that.

And we’re not doing it in Europe because we have a major weakness that China doesn’t have, that is we don’t have a government. The European Union is loose. It is 27 countries. The Brussels bureaucracy does not have the political legitimacy or the political power to plan. Given the institutions that we have, there is no way we can have an aggregate investment plan like China has.

And instead, they are trying to find substitutes for these institutions that we like. And it is very saddening that they are talking about diverting funds to the arms industry and building tanks. And, you know, fighter jets, supposedly, because Russia is about to take Berlin. Russia is not about to take Berlin. This is just a myth that they are perpetuating. Why? Because they need to spend some money replacing the Volkswagen lines that are defunct because they can’t compete with BYD and so on. So the EU is using these production line to produce tanks. So the European reaction has been wrongful. It’s been weak. It’s been inconsistent. It is, well, the urgency of the circumstances.

You see, there is a lot of disagreement. On the one hand, the French government wanted Europe to retaliate more harshly against the United States. France has been running a trade surplus, so the only way you can retaliate is to impose tariffs on American goods. This was the idea of the Macron government, to retaliate against the services, especially digital service. Germany totally disagrees. So the new chancellor wants to make a deal with Donald Trump and, they would have to make sacrifices. They would have to make concessions that will be politically catastrophic for them.

On April 3, Macron condemned the global tariff war launched by Trump at a meeting, saying that the negative consequences will primarily be felt by the American economy itself.

The French tariffs or taxes on digital services like Google and Apple and Airbnb, and Uber sound like a good idea, but if you look into it, it doesn’t look like a very good idea. This is another difference with China. China has its own tech giants. It was a strategic choice, and I think it is a very wise strategic choice, to create the Chinese wall against big Silicon Valley giants, and to say to Google and Twitter, you are out, and create your own tech giants. Europe hasn’t done that.

So what happens if Europe follows the French advice and slaps tariffs on digital services, on U.S. tech giants? They will move from Ireland to New York. Then if the Europeans want to escalate this, they will have to ban Google from functioning in Europe, in the same way that China has banned Google from functioning in China. But it is politically unfeasible. I think they will have a heart attack if they even think of it.

So another difference between China and the European Union is that China is thinking many moves ahead in a chess game, but the European Unions only think one move ahead. And then clearly they always lose the strategic game. The Americans are thinking many moves ahead. The Chinese are thinking many moves ahead. The Europeans, well, they don’t, because, as I said, we don’t have a government. There are different governments squabbling with one another. And I think that that means that Europe is going to be the greatest loser of this tariff war that Donald Trump has started.

China and Europe need to reach some form of strategic consensus, and China should take the lead in this process.

Guancha.cn: Although, as you mentioned, Europe is not a single country and the EU is a loose union incapable of responding effectively, China still hopes to build a good relationship with the EU, because we share common interests in defending free trade, addressing global warming, and other issues. Just recently, the Spanish Prime Minister visited China and reached a series of cooperation agreements. In light of U.S. protectionist measures, do you think China and European countries have an opportunity to strengthen cooperation in the future and work together to defend the global trading system?

Yanis Varoufakis: Well, absolutely. But I wouldn’t put it in terms of defending the global system, because the global system cannot be a global system about the United States. But China is already behaving like the adult amongst the children. There’s no doubt about it. China has already shown steadiness. And the reciprocity was absolutely called for. You know, Trump slaps his huge tiles on you, you slap them back on him. And essentially what you’re declaring is really very important: China is ready to move to the next chapter of its history, where it no longer relies on the American market for its net exports. That is essential.

Now, the problem that China and the European Union have is that they are both net exporters. So I cannot be net exported towards you, while you are being net exported towards me. Somebody has to be a net importer. So it is essential for China and the European Union to stop thinking of themselves as two blocs that have a need to rebalance their economies, and not rely on a certain percentage of trade surplus. China can increase its exports, but it has to expand domestic demand at the same time. And that requires an agreement, a negotiation, between the European Union and China. And I think that China should take the lead in this, because, as I said, Europe doesn’t have a government. China has a government. So the country, or the bloc that has a government, is the one that must initiate, and it must help the Europeans escape their own foolishness and their own fragmentation.

And there are ways of doing that. For instance, China should propose a joint economic stimulus plan with the EU to counter the coming recession. You know, these types of tariff wars are creating recessionary forces, which are a danger for both China and Europe. So what the European Central Bank and the People’s Bank of China, along with the governments, should do is to collaborate in a common stimulus program to increase the demand in both China and Europe. Together, that would be a magnificent way to react to the United States, to Donald Trump.

In March 2025, Europen battery cell giant Northvolt filed for bankruptcy in Sweden.

And you know what? That would really put the pressure on Trump if China manages to convince Europe to collaborate in creating stimulus that can also take the form of smart proposals from the Chinese government on how to help the Europeans’ slowing-down industrialization. So for instance, sharing green technologies like batteries and solar panels. These are areas where China is much more advanced than Europe. Various European companies are dying. You saw what happened with Northvol. China should offer to prop them up, to assist in the development of these industries in a kind of joint venture, in the same way that the Europeans came to China with showing ventures 20 or 30 years ago. These are moves that China can make in order to build trust in the European Union. Though up until recently, the EU has been simply following the United States in every anti-Chinese policy the United States choose to pursue, I think China must forget it, not forgive it, forget it, and give European Union a chance. Though I feel that the European Union will not accept that chance, but China should offer it.

If the United States and Trump want to retreat from the rest of the world and hide in a cave, China would be given a gift.

Guancha.cn: You mentioned that China has entered a new chapter, but China has always been a firm defender of the international order, a proponent of economic globalization and trade liberalization, and a steadfast supporter of the World Trade Organization. So, when Trump is undermining the international order, how do you think international organizations like the WTO can adapt to the times and play the role they are supposed to?

Yanis Varoufakis: You see, what the problem I have with this is when you say to people, we are the defender of the globalized order, you must be clear that the globalized order in the last 50 years has been a very unbalanced one that could not continue because it operated on the pattern that the United States deficit massively, sucking the net exports of China, of Japan, of Germany, of everyone into the US. Okay? Now, the American really loved that, because these exports to the United States were paid by dollars, and then the dollars came back to the United States, and the ruling class did very well out of this flow of Chinese money, Japanese money, Saudi money, Arab money, Russian money, German money into the United States. Now, I don’t think that China should be defending this global order, because it is against the interests of the United States’ working class, and it’s against the interests of Africa. It’s against the interests of the Global South.

What China should say is to help build a new, balanced, equitable global order. So instead of defending the old one, I would promote the direction of building up a new global order that is balanced, equitable, and beneficial for everyone. And I think China can do that. As for the WTO,  the IMF, and the World Bank, look, as a left-winger who lives in the West, I’ve always identified these institutions with the interests of Western capitalists. So, for me, defending them is not the best idea. You know, if I were in the Chinese government, I would say that what it is important is to have a WTO that looks after balanced, mutually advantageous trade. It will be a fantastic idea to have a World Bank that works for the world, not for the finances of New York. It could be brilliant to have a global payment system that doesn’t belong to anyone who can function anyone they don’t like and abuse the rest of the world if the rest of the world doesn’t do as it is told.

Unfortunately, the United Nations has become a tool of the US hegemony, because the United States makes sure that it uses the veto power to stop anything good from happening there. But if the United States and Trump want to retreat from the rest of the world and hide in a cave, well, let them do that, and let the rest of the world move ahead with multilateral institutions that serve humanity as a whole. And I think China would be given a gift. China can use the United Nations to end the new Cold War that the United States has launched against China, to win sympathies in the Global South. And even more than this, China could build or try to build a working relationship with the Europeans, as long as the Europeans are interested in not sliding into total irrelevance.

Editor: Chang Zhangjin