The European Union (EU) is bracing itself for a potential wave of tariffs under what is being dubbed "Trump 2.0," which could see significantly higher tariffs compared to the previous administration's policies. The anticipated escalation is expected to begin in the second quarter of the year and may result in a broader and deeper scope of tariffs affecting EU markets. During Trump's first term, US-led tariffs on EU goods were relatively contained, but Trump 2.0 may bring about more severe economic challenges due to the expansion of tariffs on steel and aluminium and threats of sector-specific and reciprocal tariffs towards the EU.
Christopher Graham and Ethan Lester noted the shift in US trade policy, stating:
"Trump 1.0 saw relatively contained US-led tariffs on EU markets; by contrast, Trump 2.0 is likely to result in deeper tariffs (evidenced by recently expanded steel and aluminium tariffs) that are broader in scope, given recent Trump rhetoric towards the EU and previous threats of sector-specific and reciprocal tariffs. Escalation is likely from Q2 onwards and could result in a sizeable hit to European exports and GDP."
The economic impact on the EU could be substantial if broad-based tariffs are implemented. EU exports to the US were valued at EUR 532 billion in 2024, making up approximately 3% of the EU's gross domestic product (GDP). Economists estimate that a uniform 25% tariff imposed on EU exports could deliver a significant GDP hit of 0.50-0.75% over a year. This scenario would reflect existing independent forecasts. The damage could be mitigated by sector-specific tariffs that target industries like steel, aluminium, agri-foods, pharmaceuticals, and automobiles, potentially affecting 30-40% of total EU exports to the US.
Graham and Lester further explained the potential impact:
"EU exports to the US were EUR 532bn in 2024, equivalent to 3% of EU GDP. We estimate that an across-the-board 25% tariff on EU exports could deliver a 0.50-0.75% GDP hit over a 12-month period, which is in line with independent estimates. This magnitude of impact could also result from reciprocal tariffs, assuming the US takes into account VAT and non-tariff barriers. Depending on the rates used, sector-specific tariffs (including steel and aluminium, agri-food, pharmaceuticals and autos) could limit the damage to EU GDP, although we would still expect them to affect c.30-40% of total EU exports to the US."
Several factors will determine the ultimate impact on EU GDP, including US demand elasticity, which varies by sector and product. The effects of exchange rates will also play a role, as will any retaliatory tariffs imposed by the EU. Additionally, US tariffs on other countries could create trade diversion effects that further complicate the economic landscape for the EU.
A negotiated solution between the US and EU remains uncertain due to the EU's substantial bilateral surplus with the US. However, some experts believe an agreement is possible despite the inevitability of some protectionist measures.
Graham and Lester provide insight into possible outcomes:
"The ultimate impact on EU GDP will depend on various dynamics, including US demand elasticity (which will differ by sector and product), exchange rate effects, EU retaliatory tariffs, US tariffs on other countries (given trade diversion effects) and the EU’s policy response. The fact that threats have been made but implementation has been delayed for other countries so far, supports our expectation that a negotiated solution can be reached between the US and EU; however, given the size of the EU’s bilateral surplus with the US, this outcome is not guaranteed – some form of protectionist measures seems inevitable."
The potential for escalating tariffs under Trump 2.0 poses a significant risk to the European economy. The coming months will be crucial as both sides navigate these complex trade negotiations and attempt to reach a resolution that minimizes economic fallout.