Europe Braces for Potential US Tariff Hikes

European ministers, meeting in Brussels, still believe they can pull former US President Donald Trump back from the brink before an August 1st deadline and salvage a bilateral trade relationship worth $1.7 trillion largely intact.

But Trump’s abrupt swings in sentiment towards the EU — at times calling it a friend, at others accusing it of being formed specifically to destroy the U.S. — make the threat of a 30% tariff very real.

“Continuing trade in the way we have been used to in our transatlantic relations will be almost impossible, and that de facto bans trade,” said Maroš Šefčovič, the EU trade chief, ahead of meeting ministers and officials from 27 EU capitals to brief them on the latest situation, regarding the 30% tariff.

EU officials had hoped they could limit the damage by agreeing to a benchmark tariff of around 10% — the rate currently in place — and seeking extra carve-outs for key industries like autos.

Last year, the U.S. took a fifth of all EU exports, making it its biggest partner. Trump's bugbear is the $235 billion U.S. deficit in the goods part of that trade, though the U.S. enjoys a surplus in services trade.

Potential Economic Impacts

Making exported European goods — from pharmaceuticals to cars, machinery or wine — too expensive for U.S. consumers to afford would have an immediate impact.

Economists at Barclays estimate that an average tariff rate of 35% on goods from the EU (including matching and industry-specific tariffs), plus a 10% retaliatory tariff from Brussels, would shave 0.7 percentage points off the euro zone’s output.

That would drain most of the euro zone’s already meagre growth and could push the European Central Bank to cut its 2% deposit rate further. “Inflation could be more deeply and persistently below the 2% target, prompting a more accommodative monetary policy stance — with the deposit rate potentially going to 1% by (March 2026),” Barclays’ economists said.

An earlier estimate from the German Economic Institute found that tariffs of 20% to 50% would cost Germany’s €4.3 trillion economy more than €200 billion between now and 2028.

Though small as a percentage, these lost activities could still upset German Chancellor Olaf Scholz’s plans to cut taxes and increase spending to update the country’s long-neglected infrastructure. “We will have to postpone a large part of our economic policy efforts because it will disrupt everything, and be a core hit to the German export industries,” Scholz said, referring to the 30% tariff.

Exploring Alternative Solutions

In the longer term, Trump’s high tariffs raise a larger question of how Europe can make up for lost activity to generate the taxes and jobs needed to fund a range of ambitions, from caring for aging populations to military rearmament.

Under its existing trade diversification policy, the EU has done well at reaching preliminary agreements with new partners but — as shown by the slow progress on the massive EU-Mercosur trade deal — it has struggled to get these deals fully signed and sealed.

“The EU doesn’t have other markets it can just turn to and sell into at a moment’s notice,” said Varg Folkman, a policy analyst at the European Policy Centre think tank, referring to the long and complex timelines involved in classic free trade agreements.

Some observers argue that a showdown with Trump is exactly what the EU needs to complete its long-delayed single-market reforms, boost domestic demand and rebalance its economy away from exports, which account for roughly half of output.

The International Monetary Fund (IMF) has estimated that the EU’s own internal barriers to the free flow of activity are equivalent to a tariff of 44% on goods and 110% on services. Proposed reforms like creating freer cross-border capital markets have made little progress over more than a decade.

“It’s easier said than done,” Folkman said, referring to the trading web of national regulations. “No deepened agreements have been struck. These barriers have been put up by EU member states themselves for their own benefit.”

Negotiations and Potential Implications

How all this will influence the EU’s negotiating tactics in less than three weeks remains to be seen, but for now, the bloc insists it is open to talks while preparing retaliatory measures should talks break down.

Some European observers believe one thing could persuade Trump to strike a deal: that the sustained uncertainty itself could delay the interest rate cuts the former U.S. president has been eager for.

“The latest trade war dynamics suggest that it will take more time to figure out the ‘landing zone’ for tariffs…and that will certainly create uncertainty for everyone, including the Fed,” said Gilles Moec, chief economist at AXA. “With this new round of aggressive blows…the calls for rapid rate cuts become harder to sustain.”