Will the EU Stand Strong? Tackling Trump's New Tariffs

Germany’s outgoing chancellor, Olaf Scholz, calls the new Trump tariffs a “fundamentally wrong” unilateral move, while Spain’s Prime Minister Pedro Sánchez and French President Emmanuel Macron echo similar sentiments. The EU braces for a 20% tariff on goods headed to the US, affecting key sectors such as wine, cars, and luxury brands. With European industries vulnerable, France is particularly concerned about its champagne and aeronautics sectors, while Germany fears for its automobile industry. Even unexpected sectors like French cognac—popular among American stars—will feel the strain, with 40% of exports flowing to the US.

An analysis reveals that Ireland is notably vulnerable, with 20% of its GDP linked to exports to the US, primarily in pharmaceuticals and technology. Other small nations like Cyprus, Luxembourg, and Malta show significant exposure to US services, while Germany leads among major economies in exposure, standing over 5% of GDP.

As the EU coordinates a response from Brussels, Commission President Ursula von der Leyen highlights the bloc’s sizeable market power. With the EU accounting for 22% of global GDP, it can consider retaliatory measures against the US, including targeting major US tech firms like Apple and Amazon. However, EU leaders are wary of escalating tensions, especially given the delicate political landscape shaped by past disputes over defense spending and energy supplies.

The EU’s strategic plan includes a blend of aggression and diplomacy: publicly threaten retaliation while seeking to negotiate a reversal of the tariffs. Despite the Trump administration dismissing any negotiation before tariffs take effect, potential offerings from the EU could include increased purchases of US LNG or military equipment—at the cost of its commitments to bolster European defense industries.

But this balancing act presents challenges, as the EU grapples with a burgeoning US trade surplus of $200bn in goods, coupled with its own vulnerability to Chinese competition as new tariffs reshape the global trading landscape. Consequently, questions arise about a possible trade war with China and the looming collapse of the international trading system.

In these uncertain economic times, the EU’s strategy also points towards reducing internal barriers within its single market, aiming for a more competitive landscape insulated from external shocks. The IMF suggests that the varied tax regimes within the EU could impose effective tariffs as high as 45% on manufacturing and 110% on services, far exceeding current US tariffs. While EU member states express unity against Trump’s tariffs, achieving consensus on internal market completion remains a divisive challenge.