Effects on EU-US trade relations of a universal tariff on imports into the US

Donald Trump’s reelection as U.S. President has introduced uncertainty into EU-US trade relations. Trump has proposed imposing a universal tariff of 10–20% on all imports into the U.S., alongside tariffs of 25% on Chinese and Mexican goods. These measures could significantly impact EU sectors heavily reliant on U.S. exports, such as cars and chemicals.

These announcements come in a delicate context of EU-US trade relations. Indeed, while their bilateral trade and investment relationship is the largest and the most integrated economic relationship in the world, the first Trump presidency and Biden’s Inflation Reduction Act (IRA) have profoundly affected the mutual trust between the two parties. The latter, in particular, negatively affected the European economy through its outright ‘Buy American’ provisions. This measure has generated fear that EU exports to the US would be hampered, and that EU firms might be enticed to relocate to the US. As a consequence, the EU has responded with the Green Deal Industrial Plan, and in particular with its component Net Zero Industry Act, in an attempt to prevent clean energy companies from leaving the EU for the US.

Facts and Figures on EU-US Economic Relations

The EU and the U.S. share the world’s largest bilateral trade and investment relationship, comprising 30% of global trade and 43% of global GDP. In 2023:

• Transatlantic trade exceeded 1.5 trillion euros.
• The U.S. was the EU’s largest export partner (19.7%) and second-largest import partner (13.7%).
• Key EU exports included medicines and vehicles, while petroleum dominated imports.

Germany, Italy, and Ireland are leading EU exporters to the U.S., with Germany accounting for 157.7 billion euros in exports in 2023. The U.S. is also a major source of foreign direct investment for the EU.

Historical Trade Tensions

In 2018, trade tensions between the EU and the US reached a significant peak, triggered by the imposition of tariffs on steel and aluminum imports by the US.

EU-US trade has faced significant tensions in the past:

1. Steel and Aluminum Tariffs (2018): Trump’s first presidency imposed 25% and 10% tariffs on steel and aluminum, prompting the EU to respond with safeguard measures, WTO legal challenges, and retaliatory tariffs on U.S. goods.
2. Airbus-Boeing Dispute: Both parties imposed tariffs on each other’s exports, resolved in 2021 through negotiations.
3. Biden’s Inflation Reduction Act (IRA): The IRA’s “Buy American” provisions raised concerns in the EU over unfair competition and incentivized firms to relocate to the U.S. The EU countered with the Green Deal Industrial Plan and Net Zero Industry Act.

In July 2018, European Commission President Jean-Claude Juncker and US President Donald Trump agreed in a joint statement to seek cooperation on trade and reduce tensions. In January 2019, the European Commission proposed eliminating tariffs on industrial goods and agreements to minimise non-tariff barriers.

Current Reactions and Strategic Responses

European leaders are divided on how to respond to Trump’s proposed tariffs:

• European Commission: Advocates proactive measures, such as retaliatory tariffs, negotiations for exemptions, and leveraging forums like the Trade and Technology Council (TTC) to promote cooperation on strategic issues.
• Member States: Positions vary. Germany emphasizes preserving strong U.S. ties, while Hungary urges avoiding sanctions and fostering connectivity.

Possible EU Responses

1. Retaliatory Measures: Reinstating tariffs on politically sensitive U.S. goods, such as motorcycles and bourbon, or leveraging new tools like the Anti-Coercion Instrument to impose broader trade restrictions.
2. Negotiations: Striking deals to boost U.S. imports (e.g., LNG, soybeans) or aligning on policies toward China to secure tariff exemptions.
3. Geopolitical Alignment: Deepening collaboration on defense purchases or aligning with U.S. strategies to counter China’s influence.
4. EU Internal Adjustments: Strengthening EU competitiveness, deepening integration in services, and enhancing industrial resilience.

Strategic Outlook

The EU, building on the events of Trump’s last term, is reportedly seeking a deal before considering retaliatory tariffs, although negotiations have been long and fruitless. Trump could strengthen the EU’s position against China, complicating Germany’s position, especially in the face of Scholz.

Trump’s policies could drive the EU toward greater economic autonomy while exacerbating internal divisions. Countries with strong trade ties to the U.S. (e.g., Germany) or China (e.g., some Member States) may prioritize bilateral relations, complicating unified EU action. The EU aims to balance strategic engagement with preparedness for retaliatory measures, fostering resilience in its economy.