Europe Prepares for Trade Battles Under Trump’s Second Term
Wednesday, 20 November 2024
Donald Trump’s return to the White House has set the stage for a potentially turbulent period in transatlantic relations. As Trump revives a focus on tariffs and economic protectionism, Europe’s economic prosperity and competitiveness face significant challenges. The European Union will need to find the way to deal with American pressures without compromising its strategic autonomy.
This article is based on insights from a recent Future is Blue podcast episode, where Carlos Carnicero Urabayen spoke with Alicia Garcia-Herrero, Senior Fellow at Bruegel and Chief Economist for Asia Pacific at Natixis, and Raymond Torres, Director of Funcas Europe. The episode dives into the potential impacts of Trump’s policies on EU-U.S. relations and the European economy. Listen to the full episode here.
Higher tariffs and heightened uncertainty
During his first term, Trump targeted Europe with tariffs on steel and aluminium. Many in Europe now expect a broader set of tariffs that could extend across industries, particularly in sectors where the U.S. competes directly with European manufacturers, like automotive and chemicals, or faces a trade deficit. As Garcia-Herrero noted, “It sounds like this one’s going to be tariffs across the board.”
In the event of heightened tariffs, Europe’s industries, especially in export-reliant economies like Germany, may suffer significantly. Trade analysts suggest that while a general 10% tariff could be mitigated by currency adjustments, the real risk lies in targeted tariffs on high-stakes sectors. Such specific tariffs would be more challenging to counteract, particularly in areas where European goods directly compete with U.S. products. Beyond the immediate impact on trade, the looming policies also introduce a new layer of uncertainty into global markets, which could erode business confidence across supply chains.
Torres expressed concern about this uncertainty, stating, “We may move to a more unpredictable system, especially after recent geopolitical shocks.” He warned that a further shift away from a multilateral approach could affect the already fragile investment climate in Europe, delaying the economic recovery.
The case of the Auto Industry
Among the sectors most exposed to Trump’s trade policies, Germany’s automobile industry stands out. European automakers may be forced to consider localizing production within the United States to sidestep the tariffs. However, this approach poses logistical and financial challenges, and it could significantly alter the structure of Europe’s automotive industry.
The situation becomes more complex when considering the U.S.-China trade rivalry. “If Trump intensifies tariffs on Chinese-made cars, it could drive China to increase exports to Europe, creating fierce competition at a time when European automakers are already struggling to keep up in the electric vehicle market”, says Raymond Torres. China may try to increase exports to other markets, including Europe… and this could put Europe in a difficult position. As Chinese manufacturers ramp up production of electric vehicles, the EU’s already lagging sector may find it difficult to retain market share.
Europe’s Strategic Response: Deepening Integration
Trump’s trade policies however, may also catalyze a positive shift within Europe, pushing the EU to accelerate its own integration efforts. Projects like the EU’s Capital Markets Union have faced delays. The new trade landscape could drive EU key stakeholders to further advance EU integration, particularly with the Mario Draghi report still fresh in everyone’s minds.
There are signs of momentum within Brussels to respond decisively. Yet, Garcia-Herrero expressed caution, stating, “This is Brussels, and these are not the Member States.” She emphasized the growing political challenges within EU nations, pointing out that France and Germany, both facing weak governments, might struggle to unify around bold policies. “Whether it’s Italy or others, I just feel that this is very fragile”.
China as a Common Ground?
One potential area for cooperation between the EU and the U.S. lies in their shared stance on China. Unlike during Trump’s first term, when Europe hesitated to impose tariffs on Chinese goods, the EU’s view on China has evolved. Europe’s trade deficit with China is growing, with China’s economic deceleration affecting European exports. As Garcia-Herrero observed, “Our situation has changed… I think the EU will be more accommodating on the U.S. side concerning this issue” when it comes to countering China’s influence.
With fewer economic benefits to be gained from China and an increasingly challenging trade landscape, Europe might be tempted to align more closely with U.S. strategies on China. This cooperation could involve aligning tariffs or restrictions on Chinese goods, particularly in industries where China’s overcapacity impacts European markets. That said, if Europe goes too far, it may undermine its commitments with other trading bocks and the multilateral system at large. This is a tough policy conundrum.
Diversifying Global Partnerships
To mitigate the risks associated with U.S. tariffs and a slowing Chinese economy, Europe must look to other regions for trade partnerships. Strengthening ties with emerging markets in Asia, Latin America, and Africa could help the EU establish a more resilient global trade network. In a world where multilateralism appears to be waning, regional agreements and strategic partnerships could offer a vital counterbalance to U.S. and Chinese economic pressures.
Torres, advocating for this diversification, noted, “Europe should engage with other partners, not just the U.S. and China… this would compensate for the difficulties elsewhere.” He suggested that by fostering stronger ties with regions outside of the U.S. and China, Europe could achieve greater stability and lessen its dependency on its largest trading partners.
Cooperation or Confrontation?
Europe faces a pivotal moment in its relations with the United States. Trump’s return has prompted EU leaders to weigh their options carefully, knowing that how they respond could define the continent’s economic trajectory for years to come.
While Europe’s economic challenges may deepen, Trump’s policies also present a unique opportunity for the EU to reassess its position on the global stage. By building a more unified European market and forging new alliances, Europe could emerge more resilient and better positioned to navigate an increasingly multipolar world. What is certain is that Trump’s second term is poised to reshape the dynamics of transatlantic trade and test Europe’s political willingness to deepen integration.
You can listen to the podcast episode here.
Carlos Carnicero Urabayen