Trump’s proposed 10% tariff on EU goods could harm Europe’s export-led sectors like automotive and machinery, affecting economies like Germany and Italy. Potential retaliation by the EU may escalate tensions, risking further disruptions in US-EU trade relations.
ADVERTISEMENTA potential 10% tariff on all European Union goods exported to the United States, a key proposal from Donald Trump in his 2024 re-election campaign, could profoundly impact Europe’s export-driven industries and disrupt its largest overseas trade relationship.
As EU exporters brace for possible obstacles, data from the European Commission underscores the economic vulnerabilities at stake, with Germany, Italy, and Ireland leading the list of countries most affected.
How crucial are European Union exports to the US?
Although China surpassed the United States (US) as the European Union’s top goods partner in 2020, the US remains Europe’s largest overall trading partner when services and investment are included.
According to European Commission data, the European Union exported €502.3 billion in goods to the US in 2023, making up a fifth of all non-European Union exports.
Moreover, the European Union is a net exporter of goods to the US, with a positive goods balance of about €158 billion in 2023.
The American market is especially vital for major European economies like Germany, Italy, and Ireland,
Germany alone accounted for €157.7 billion in exports to the U.S. in 2023. Italy and Ireland followed with €67.3 billion and €51.6 billion in exports, respectively.
Which European sectors are most at risk?
European exports to the US are led by machinery and vehicles (€207.6 billion), chemicals (€137.4 billion), and other manufactured goods (€103.7 billion), which together comprise nearly 90% of the bloc’s transatlantic exports.
According to the European Commission, these sectors were responsible for a significant trade surplus in 2023, with €102 billion in machinery and vehicles and €58 billion in chemicals.
Breaking down the export categories, medicinal and pharmaceutical products led in 2023 with €55.6 billion, followed by motor vehicles at €40.7 billion and medicaments at €36.1 billion.
Germany and Italy, as Europe’s leading producers of machinery and vehicles, face particular risk.
Automotive exports, a critical segment of Germany’s economy, could experience a drop in US demand due to price increases, further weakening an already stagnant the sector and jeopardising jobs.
Should a 10% tariff be imposed, these industries face potential loss of competitiveness due to an increase in final costs, risking production slowdowns and job cuts if US consumers turn to other markets for these goods.
For European industries, the threat of US tariffs comes at a time of existing economic strain, as the bloc’s manufacturing output has been consistently shrinking over the last two years.
What impact would tariffs have on the EU-US trade balance?
Following Russia’s invasion of Ukraine and the European Union’s pivot away from Russian energy, the US has become an essential supplier of oil and natural gas, leading to a growing trade deficit in energy imports.
ADVERTISEMENTThis shift created an energy goods deficit of €70 billion in 2023, and a 10% tariff on European Union exports would likely further exacerbate this imbalance, diminishing the overall trade surplus with the U.S. and impacting economic growth within the bloc.
This effect would likely be exacerbated if the dollar were to strengthen significantly against the euro as a result of trade tariffs.
In addition to goods, European Union’s services trade with the U.S. is also in a vulnerable position.
According to the European Commission, the European Union registered a €104 billion deficit in services with the U.S. in 2023, a gap that has widened each year since 2021.
ADVERTISEMENTAlthough the service sector would likely feel less direct impact than goods under a tariff regime, any retaliatory measures or escalation of trade barriers could disrupt sectors like finance, tourism, and professional services, which are critical to the EU’s service-oriented economies.
Could European countries retaliate?
If Trump proceeds with the proposed tariff, the European Commission may consider a range of countermeasures to protect European exporters.
Possible responses include retaliatory tariffs on U.S. goods or diversifying trade partnerships to reduce reliance on the American market.
However, European leaders are cautious of actions that could worsen the situation and disrupt well-established economic ties between the two economies.
ADVERTISEMENTRetaliation or intensified tariffs could lead to production slowdowns in key export sectors, pushing some European nations to prioritise resilience by exploring new trade relationships in Asia or expanding intra-European demand for their exports.