Donald Trump’s imposition of historically unprecedented tariffs this week marked the dawn of a new geopolitical era – and Europe barely noticed.

The US president’s sweeping levies, which included the world’s inaugural “secondary tariffs” on India, upended the global economy and triggered an astonishing thaw in relations between New Delhi and China. Meanwhile, EU leaders largely pontificated about what they should do to end the two wars raging just beyond the bloc’s borders – and then, predictably, did almost nothing.

The conflicts in Ukraine and Gaza are broadly similar in the death, destruction, and mental and physical trauma they have caused. The reasons for Europe’s inability to influence them, however, are vastly different.

In Ukraine’s case, the reasons are economic. After imposing eighteen rounds of sanctions on Russia, Europe, quite simply, doesn’t have that much left to sanction. Moreover, the Kremlin’s capacity to continue the war is overwhelmingly dependent on factors far beyond Brussels’ control, Moscow’s deepening ties with Beijing chief among them.

In the case of Gaza, however, the main impediments are political. Many EU countries –especially those still wracked with guilt over their culpability for the Holocaust – are deeply averse to any measures that could significantly impede Israel’s war effort.

If this internal political resistance were to shift – and, with Germany’s announcement earlier today that it would suspend some weapons shipments to Israel, there are signs that it already has – the EU could, in theory, inflict severe economic pain on the country.

The EU is Israel’s top trade partner, accounting for more than a third of its imports (which include strategically critical goods, like fuel and machinery) and a quarter of its exports. Unlike the bloc’s pre-war relationship with Russia, this dependence is also strikingly asymmetric: Israel is the EU’s 31st biggest trading partner, ranking behind Morocco and Algeria as the bloc’s third-largest in the broader Mediterranean region.

This reliance extends to the financial sphere. Europe is, by some distance, Israel’s largest investment partner: the 27 EU member states held investments worth €72.1 billion in Israel in 2023 – almost double the US.

Underscoring this financial dependence, roughly a quarter of the Bank of Israel’s reserves are held in Europe. In principle, these could also be immobilised – much like Russia’s central bank assets have been – and their ‘unfreezing’ made conditional on Israel’s ending the war (or paying for Gaza’s reconstruction).

Finally, Europe’s ability to inflict pain on Israel is further bolstered by the fact that the country’s economy is already under deep strain.

Almost two years of continuous war have caused Israel to suffer weak growth, labour shortages, a swollen budget deficit, and general geopolitical uncertainty – sparking warnings that the country’s credit rating could soon be downgraded to “junk” status.

External obstacles

Israel’s profound vulnerability to EU sanctions is, in fact, widely recognised by analysts.

“The potential suspension or downgrading of EU-Israel trade ties would add significant pressure” on Israel, wrote Lize de Kruijf, a project assistant at the Atlantic Council, a US think tank.

“Given the scale and interdependence of EU-Israel trade, such a move could affect Israel’s economic resilience and, by extension, its ability to sustain long-term military operations in Gaza,” she added.

The Economist similarly noted last year that even EU export restrictions on military-related goods could “hurt” Israel. “Although the country’s leaders can shrug off Chilean or South African threats, they are much more vulnerable to European action,” it stated.

These (and other) analyses invariably stress the EU’s internal political obstacles to such proposals – namely, the deep resistance by many of its member states. But what they miss – and what this week’s events underscore – are the external political obstacles, i.e. Trump.

This year the US president has shown clearly that he regards trade as a means to achieve various political ends. Just last week, Trump explicitly warned Canada that its decision to recognise Palestine “will make it very hard for us to make a Trade Deal” – before promptly hiking tariffs on Ottawa to 35%. It is overwhelmingly likely that, if the EU imposed severe sanctions on Israel, Trump’s retaliation would be at least as swift – and more devastating.

But Trump might not even need to impose tariffs at all. EU officials have effectively admitted that the main reason for the massively asymmetric “trade deal” with the US was their fear that Trump might abandon Ukraine. Any threat to withdraw US military support for Europe or Kyiv would almost certainly cause the bloc to rescind sanctions on Israel – and then apologise to Trump for the inconvenience.

Strategic short-sightedness

There is something of an irony here. On Tuesday, the EU effectively endorsed Trump’s “secondary sanctions” tariffs on India – which are, ostensibly, designed to force New Delhi to stop purchasing Russian oil and, thus, end the Ukraine war.

“We welcome any pressure, and in particular US pressure on Russia, to accept a ceasefire through any means necessary,” a Commission spokesperson said.

Such statements are not only a strategic mistake, insofar as they likely hamper the EU’s ability to mitigate the impact of Trump’s tariffs through strengthened ties with India and other countries in the Global South.

They also set a dangerous precedent: by endorsing Trump’s use of tariffs for nakedly political ends, Brussels risks inadvertently legitimising their use against Europe.

“You can stop wars with tariffs,” Trump claims. Although the claim itself is debatable, the natural inference is that the US president also believes he can use tariffs to prevent others from stopping them.

And, in Europe’s case, he’s probably right.

Economy News Roundup

The EU’s promise to invest over a trillion dollars in US energy and infrastructure is “in no way binding”, Brussels says. “The commitments… we have transmitted to the US administration [are] aggregate intentions as regards energy spending and as regards investment in the US economy by EU companies,” a European Commission spokesperson said on Thursday. The comments came two days after US President Donald Trump threatened to hit the EU with a 35% tariff if it fails to deliver on its commitment to invest $600 billion in US infrastructure over the next three and a half years. Read more.

Brussels pushes back on German criticism of trade deal. A Commission spokesperson said on Tuesday that the EU executive was “surprised” by German Finance Minister Lars Klingbeil’s claim that the bloc is “too weak” on trade policy. “It is most surprising to us to hear that a minister from the member state in question has expressed that view given that nothing has happened here […] without the clear signal received from our member states,” the spokesperson said. Read more.

EU could scrap digital laws to appease US. Bernd Lange, chair of the European Parliament’s international trade committee, told Euractiv that “there is a risk” that the EU’s landmark Digital Services Act (DSA) and Digital Markets Act (DMA) could be jettisoned to finalise last month’s preliminary trade deal with the US. The DSA, which targets harmful online content, has been repeatedly criticised by US officials for enabling “digital censorship” and the “silencing” of Brussels’ political opponents. The DMA, meanwhile, has been central to the Commission’s antitrust probes and fines targeting US tech giants like Google, Apple, and Meta, drawing backlash from Trump and Silicon Valley. The Commission has repeatedly claimed that the bloc’s digital rulebook is not up for discussion during trade talks with Washington.  Read more.

EU and US agree on how to cut out China. Despite offering sharply conflicting official accounts of last month’s trade deal, Brussels and Washington both strongly committed to bolstering their “economic security” – a thinly veiled allusion to reducing their dependence on Beijing for strategic products and protecting their industries from increasingly fierce Chinese competition. Economic security has also been “one of the easier issues” discussed by EU and US negotiators in recent months, a senior EU official said. Analysts noted that the near-identical language used by Brussels and Washington suggests that the EU, which is officially committed to “de-risking but not decoupling” from China, is becoming increasingly sympathetic to America’s tougher line. Read more.

Brussels suspends US countermeasures despite lack of auto tariff relief. The Commission said on Monday that it will delay the imposition of retaliatory duties worth €93 billion on US goods despite Washington’s failure to follow through on its pledge to slash auto levies from 27.5% to 15%. The reduction of US car duties is crucial for Europe’s long-suffering auto industry, which is struggling to keep pace with increasingly fierce competition from Chinese electric vehicle manufacturers. The US accounts for more than a fifth of the EU’s car exports, with €40 billion worth of autos shipped to America in 2024. Read more.

The Economy Brief will be on pause for summer, returning from 29 August.

(cp)