With the US elections approaching next week, let’s examine how one of Donald Trump’s key policy proposals might affect Europe’s economies.
As we know from his previous presidency, Trump despises trade deficits. Reducing them is the primary goal of his trade policy. Two weeks ago, Trump called out the European Union as a “mini-China” due to the trade deficit between the US and the EU, which stood at about 158 billion euros in 2023.
Trump’s go-to tool in reducing deficits – even his favourite word – is tariffs.
Trump has repeatedly proposed a 10% universal tariff on ALL goods imported to the US. This would increase the price of products like French wine, Italian cheese, and German cars, making them more expensive for American companies and subsequently consumers.
These higher prices could lead Americans to purchase fewer European goods, impacting EU businesses. The European Commission estimates that a 10% tariff could reduce EU exports to the US by as much as one-third.
What will be the damage to the European economy?
So this tariff would clearly harm Europe’s economies harshly, though economists disagree on the exact impact. This also depends on how the European Union would react and on how much tariffs would directly increase prices.
Nevertheless, Goldman Sachs estimates that a 10% tariff would lower the Eurozone’s GDP by 1%. More radical predictions by Dutch bank ABN AMRO suggest Trump’s tariffs would reduce eurozone growth by 1.5% by 2028. If this were to happen today, it would put the EU’s already sluggish economy into a recession.
The economic fallout would be substantial because the United States is Europe’s largest trading partner. The EU-US trade relationship is the world’s most valuable, worth around €1 trillion in goods and services annually. EU countries exported €502 billion worth to the United States in 2023. This makes the US the primary destination for EU goods exports, at 19.7% of total extra-EU exports.
What would 10% tariff mean for specific EU countries?
While the EU as a whole would be hit hard, some Member States are more vulnerable than others due to their greater reliance on exports. This is especially true for countries invested in industries such as machinery, automotive and chemicals – which combined made up 68% of EU exports to the US last year.
This being said, here are some of the EU countries that would be particularly vulnerable to American tariffs:
- Germany. German exports to the US hit a new high in 2023, with 10% of its exports going there at a total value of 158 billion euros. As a leading exporter of cars and vehicle parts and the US as the biggest importer of German cars, Germany would be hit hard. The US is also a key market for German pharmaceuticals, machinery, chemicals and industrial equipment. Because of this high exposure, a 10% tariff could slice off up to 1.6% of Germany’s GDP.
- Italy. Italy is another country that reached an all-time high in exports to the US last year, at about 68 billion euros or 11% of total exports. Italy is a major exporter of luxury goods, including fashion, food products like cheese and wine, and automotive components. The diversity of its exports could mitigate some of the damage for Italy however.
- The Netherlands. As a trade and logistics hub, the Netherlands is highly exposed to tariffs. Several of its sectors—including electronics, machinery, and chemicals—depend heavily on US markets. However, a significant portion of its exports to the US are in services such as financial services, rather than goods.
- Finally, Ireland. A whopping 28% of Irish exported goods went to the US last year. It’s heavily involved in pharmaceuticals, medical devices, and tech products. And importantly, many American multinationals use Ireland as a manufacturing base. Tariffs could prompt them to move some of their operations back to the States instead, which would be a major blow to the Irish economy.