US-EU Trade on a Knife’s Edge: Trump’s Tariffs Threaten Economic Repercussions
The European Union awaits a critical decision on Monday that could dramatically reshape transatlantic trade, as President Donald Trump weighs imposing substantial tariffs on goods from America’s largest trade partner. Economists warn that escalating tariffs could trigger widespread repercussions for businesses and consumers on both sides of the Atlantic.
In early April, Trump initially implemented a 20% import tax on all EU-made products, targeting nations with which the United States maintains a trade imbalance. However, hours after the duties took effect, he suspended them at a rate of 10% until July 9 to alleviate financial market anxieties and allow for ongoing negotiations.
Expressing dissatisfaction with the EU’s position in trade discussions, Trump has signaled his intent to increase the tariff rate on European exports to 50%. This escalation could significantly inflate the cost of a wide range of European products in the U.S., from French cheeses and Italian leather goods to German electronics and Spanish pharmaceuticals.
The EU’s executive commission, responsible for trade negotiations on behalf of the bloc’s 27 member nations, has expressed hope for a resolution with the Trump administration. However, it has also prepared to retaliate with tariffs on hundreds of American products, including beef, auto parts, beer, and Boeing airplanes, should a deal fail.
U.S. Treasury Secretary Scott Bessent indicated on CNN’s “State of the Union” program on Sunday that “the EU was very slow in coming to the table,” but acknowledged that talks were now making “very good progress.”
The Scale of US-EU Trade
The commercial relationship between the U.S. and the EU is described by the European Commission as “the most important commercial relationship in the world.” In 2024, the value of EU-U.S. trade in goods and services reached a staggering 1.7 trillion euros ($2 trillion), averaging 4.6 billion euros per day, according to Eurostat, the EU’s statistics agency.
Crude oil represents the largest U.S. export to Europe, followed by pharmaceuticals, aircraft, automobiles, and medical and diagnostic equipment. Conversely, Europe’s primary exports to the U.S. include pharmaceuticals, cars, aircraft, chemicals, medical instruments, and wine and spirits.
Trade Imbalances and EU Surplus
Trump has repeatedly voiced concerns over the EU’s 198 billion-euro trade surplus in goods, highlighting that Americans purchase more goods from European businesses than vice versa. However, this deficit is partially offset by the U.S. services sector, which excels in areas like cloud computing, travel bookings, and legal and financial services. The U.S. services surplus reduces the overall trade deficit with the EU to 50 billion euros ($59 billion), representing less than 3% of total U.S.-EU trade.
Key Points of Contention
Prior to the current administration, the U.S. and the EU enjoyed a generally cooperative trade relationship characterized by low tariff levels. The U.S. rate averaged 1.47% for European goods, while the EU’s averaged 1.35% for American products. Since February, however, the White House has adopted a less conciliatory stance.
In addition to the fluctuating tariff rates, the EU has been subject to the administration’s 50% tariff on steel and aluminum, and a 25% tax on imported automobiles and parts. U.S. officials have raised concerns regarding agricultural barriers, specifically EU health regulations that prohibit the import of chlorine-washed chicken and hormone-treated beef.
Trump has also criticized Europe’s value-added taxes (VAT), which range from 17% to 27% across EU member states. However, many economists argue that VAT is trade-neutral as it applies equally to domestic and imported goods. The EU maintains that these taxes are not negotiable, as they are determined by national legislation.
“On the thorny issues of regulations, consumer standards and taxes, the EU and its member states cannot give much ground,” stated a senior economist at Germany’s Berenberg bank. “They cannot change the way they run the EU’s vast internal market according to U.S. demands, which are often rooted in a faulty understanding of how the EU works.”
Potential Economic Impacts
Economists and industry leaders predict that increased tariffs will inevitably lead to higher prices for U.S. consumers on imported goods. Importers will need to decide how much of the added cost to absorb through reduced profits versus passing on to customers. Mercedes-Benz dealers in the U.S. have already announced a hold on pricing for the 2025 model year “until further notice.” While the German automaker benefits from producing 35% of its U.S.-sold vehicles in Tuscaloosa, Alabama, it anticipates “significant increases” in prices in the coming years.
Simon Hunt, CEO of Italian wine and spirits producer Campari Group, indicated to investment analysts that prices could either increase or remain stable depending on competitor actions. The company might choose to maintain prices on brands like Skyy vodka or Aperol to gain market share if rivals raise theirs.
Trump argues that restricting foreign competition will stimulate a revival of American manufacturing. However, many companies remain skeptical, suggesting that any positive economic effects would take years to materialize. Nevertheless, some corporations are considering shifting production to the U.S. France-based luxury group LVMH, encompassing brands like Tiffany & Co., Louis Vuitton, Christian Dior, and Moët & Chandon, is exploring the possibility of relocating some production to the United States. The company’s billionaire CEO, Bernaud Arnault, who attended Trump’s inauguration, has urged Europe to pursue a deal based on reciprocal concessions.
“If we end up with high tariffs, … we will be forced to increase our U.S.-based production to avoid tariffs,” Arnault said. “And if Europe fails to negotiate intelligently, that will be the consequence for many companies. … It will be the fault of Brussels, if it comes to that.”
Forecasts and Potential Outcomes
Forecasts suggest the U.S. economy could be more vulnerable if negotiations collapse. Without a deal, the EU’s gross domestic product could decline by 0.3%, while U.S. GDP could fall by 0.7% if Trump imposes tariffs of 10% to 25% on European goods, according to a research review by Bruegel, a Brussels-based think tank.
Given the complexity of the issues, the two sides may only reach a framework agreement by the deadline. This would likely maintain a 10% base tariff, along with the existing tariffs on steel, aluminum, and automobiles, until a comprehensive trade agreement is finalized. A senior analyst predicts that “the U.S. will agree to deals in which it takes back its worst threats of ‘retaliatory’ tariffs well beyond 10%,” but cautions that “the road to get there could be rocky.”
The U.S. offering exemptions for certain goods could facilitate a deal, and the EU might consider easing some regulations viewed as trade barriers by the White House. While Trump may portray any outcome as a victory, the ultimate burden of his protectionist policies would likely fall on U.S. consumers.
