One issue that continues to dominate and inflame the debate on international trade is tariff policy. This discussion is most acute in the United States and the Eurozone. What you’re probably thinking… Former President Donald Trump wanted to use tariffs to reinvigorate the American economy. He hopes to benefit American producers with this strategy. Meanwhile, the Eurozone is reportedly considering retaliatory tariffs up to 25% on multiple classes of American goods. This politically charged decision reverberates across financial markets and rewrites long-term economic predictions.
Tariffs are federal customs duties paid on specific imported goods or categories of products. In the process, they’ve become the focus of trade negotiations. The Wall Street Journal’s editorial board has even called for other countries to bring their tariffs down to zero. This key recommendation proposes that in exchange for countries lowering their tariffs, Trump would agree to lower his tariffs in kind. This would help level the playing field in international trade.
Eurozone’s Response to US Tariffs
The European Commission is set to propose retaliatory tariffs against a wide array of US exports, starting with the highest value exports first. Today this list runs the gamut from tobacco to steel, textiles, eggs, dental floss and poultry. If these tariffs were to be enacted, they could reach as high as 25%. This would have a serious impact on all American exports finding their way into the Eurozone market.
So it’s not only in response to the trade war with the U.S. Rather, it is taking a smart, strategic step forward, reading the landscape of where we are headed. Economists have fought the battle over the desirability of tariffs for decades. They differ widely on their views of tariffs’ impact on domestic economies and the international trade landscape. Whatever still persists or is being undertaken with these discussions, it is certainly clear that both regions are keeping an eye on one another’s moves.
Zooming out to the big picture, in many ways Mexico has been the poster child for how successful US trade relations have become. As of 2024, Mexico edged out China as the number one exporter to the United States at $466.6 billion in exports. These five countries plus China and Canada combined constituted 42% of total US imports. Their impact has become outsized, to the detriment of America’s trade landscape.
Market Reactions and Economic Indicators
As the possibility of new tariffs was made public, the USD faced moderate selling pressure. Once again, positive sentiment about the prospect of tariffs was turning the mood of investors. This optimism should be approached with caution, as the impacts of trade wars can be pernicious and widespread.
As we can see, the EUR/USD currency pair has amply reacted to these developments. The bearish potential for this pair seems to be waning. The case for a huge move higher is still lacking. Important resistance would come from the 20 Simple Moving Average (SMA) which is flat around 1.0860. Currently it is providing a solid floor in the EUR/USD pair during this wild time.
The Momentum indicator is neutral. This indicates there is little conviction in the EUR/USD pair’s current directional moves at the moment. Longer-term investors, including many asset managers and banks, are watching market developments very carefully. Speculators are now turning their attention away from macroeconomic news toward US protectionist policies’ effect on global economic growth and global inflation.
Implications for Global Trade
Even more than usual, the current tariff negotiations have captivated economists and market traders. As countries chart a course through these wild seas, they need to consider the potential upside while considering the downside of adopting protectionist policies. Tariffs can act as a twofold sword, protecting domestic industries while playing the role of a trade barrier.
Moreover, as evidenced by recent developments, tariffs have become a major market topic that could influence investment decisions moving forward. The deep integration of today’s global economies ensures that any change in trade policy can send shockwaves around the globe. Infrastructure stakeholders from every sector need to be on their guard. Now they have to decide how these unprecedented changes will impact their business and bottom line.