US tariff threat raises risk for Europe as trade war fears grow

US tariff threat raises risk for Europe as trade war fears grow

The United States threatened the European Union with 30 percent tariffs over the weekend, shocking Brussels just when it thought a transatlantic trade deal was almost done.

The bloc still hopes that an agreement can be reached before the August 1 deadline, when punitive US tariffs are expected to take effect.

But the EU has also prepared countermeasures, raising the possibility of a trade war with serious consequences for the global economy.

It could be said that Donald Trump’s announcement on July 12th – imposing a blanket 30 percent tariff on all imports from the 27-member bloc – was quite shocking.

Since the US president first threatened the EU, as well as most other global trading partners, with severe trade measures in early April, Brussels has been willing to find some compromise.

European diplomats and politicians believe a transatlantic deal was very close, hinting that a basic tariff of around 10 percent could be agreed, with exemptions and quotas for various industries to be worked out later.

Speaking on condition of anonymity, they say they see the unexpected U-turn from the White House as a “negotiating tactic” to secure a better deal, especially for American technology companies facing increased taxes in Europe.

The EU still hopes that something can be achieved before the August 1 deadline, even if it is just a delay of a few months.

The aim is to restore tariffs to 10 percent or close to that figure. The EU is willing to accept a tariff of 15 percent as a maximum limit without taking retaliatory measures.

Countermeasures worth billions of euros

Meanwhile, the European Commission has prepared precisely such countermeasures. It has even compiled a 200-page list of American goods that could be targeted.

Approved by EU trade ministers during a meeting in Brussels on July 14, the commission proposed countermeasures worth 72 billion euros, targeting everything from aircraft, car parts and alcoholic beverages such as bourbon, to smaller items such as lighters and smoking pipes.

This comes on top of another set of countermeasures worth 21 billion euros, prepared in response to US tariffs on European steel and aluminum, which will take effect on August 6.

Given that the initial retaliatory proposal, seen by Radio Free Europe, amounted to almost 100 billion euros, this shows that the bloc is very careful not to appear too tough on Washington.

The agreement is still the desired outcome, not an escalation of retaliatory measures, and rightly so, given the bloc’s export-focused economy.

While there is still no definitive estimate of how a full-blown transatlantic trade war would affect the European and American economies, European Trade Commissioner Maros Sefcovic has warned that a 30 percent tariff would essentially undo trade between the two sides.

Fear of recession

This is a bleak outlook, given that bilateral EU-US trade in goods and services was worth €1.68 trillion last year.

This represents about a third of all global trade.

EU and US companies have invested a combined €4.7 trillion in each other’s markets. While not all of these investments would be reversed immediately, the risk is high.

EU economists recently lowered their growth forecast for the eurozone in 2025 to 0.9 percent, from 1.3 percent at the end of 2024, citing the threat of tariffs as the reason.

They have also warned of a possible future recession.

Germany, Europe’s economic powerhouse, had hoped for a return to growth after two years of recession. But it now fears the latest tariffs could shave 0.5 percent off its economy this year.

Berlin believes it will lose 1 billion euros in exports to the US every month.

This is a serious blow to a country that imports the majority of American goods into the EU and is the largest exporter to the US.

Other countries and industries also risk losses, especially luxury brands and the pharmaceutical industry.

Business lobbying in Italy has warned that even a 10 percent tariff from the US could lead to losses of 20 billion euros and nearly 120.000 jobs.

About 90 percent of all French cognac is exported to the US, and 53 percent of Ireland’s exports outside the EU go to America.

The rationale for the US tariffs stems largely from the Trump administration’s belief that the EU has been “unfair” to the US in trade, particularly through non-tariff barriers such as taxes on digital services.

Tariffs are seen as a way to limit or completely eliminate the trade deficit and help bring manufacturing jobs back to the U.S. The current gap between the EU and the U.S. stands at about $50 billion in the bloc’s favor.

The result, still unclear

It is not yet clear whether this strategy is working or not.

The EU has emphasized that American exports to the EU support 2.3 million jobs in the US and European investments in the US keep 3.4 million people employed.

The biggest fear remains that the US will face lower economic growth and inflation.

Markets have not panicked like they did in April when the tariffs were first announced, but they have fallen again due to uncertainty. Investors still believe a deal can be reached.

However, US economic growth is expected to slow in 2025 compared to last year.

And, although inflation is not yet particularly high, the cost of tariffs will be felt by consumers.

While transatlantic trade will continue, albeit perhaps in lower volumes, it is highly significant that European Commission officials have been traveling around the world to sign potential trade agreements.

The Commission hopes to soon finalize deals with Australia and India, and may also approve a pact with the Mercosur trade bloc (Argentina, Brazil, Paraguay and Uruguay), an agreement that has been under discussion for more than a quarter of a century.