Three scenarios on the EU response to US tariffs

The July 9 deadline for an EU-US trade deal is quickly approaching, and several outcomes are plausible. The EU has run a sizeable goods trade surplus with the US for many years, which the US has sought to address with new tariffs. This presents a challenge for the EU on how to respond.

The three main principles we think will guide the EU response: 1) The EU will retaliate; 2) EU retaliation will be targeted; 3) The EU’s retaliation will be smaller.

In this report, we discuss our baseline tariff assumptions and two scenarios:

Baseline: We assume the US keeps the 10% “reciprocal” tariff on the EU indefinitely, as well as the sectoral tariffs as they currently stand. We assume the EU will retaliate by imposing a 20% tariff on roughly 25% of US imports. We also think the EU will respond to the sectoral tariffs on cars and parts, and on steel and aluminium, mirroring the US.

Moderate downside scenario: We anticipate the US reverting to the 20% reciprocal tariff, together with higher sectoral tariffs. The EU would broaden the scope of products subject to tariffs relative to that assumed in our baseline.

Severe downside scenario: A severe escalation in the trade war could lead to the EU using its Anti-Coercion Instrument for the first time. It offers a much broader scope for retaliation, affecting also services and US tech giants. However, it would be a last resort, given the strong response it would provoke.

Download the full report to explore detailed scenarios and understand their impacts.