Now that Donald Trump is set to be the next US president, beginning on January 20th, European leaders and many of its citizens wonder how it might affect their economic prospects.
If Trump makes good on his election campaign promises, Europe needs to prepare for a new era of American protectionism. The policies of Trump’s administration will have major consequences for Europe’s economic and geopolitical stability.
If Trump winds down climate protection measures, how can Europe compete economically if it chooses to maintain them?
Trade and Investment
Since WWII, America and Europe have been close economic, political, and cultural partners. In 2021, bilateral trade between the two regions reached €1.2 trillion.
In 2023, the total foreign direct investments (FDI) in the United States were valued at $5.39 trillion, of which $3.46 trillion or, 64.19%, came from Europe.
According to the European Commission, “Transatlantic trade reached an all-time high of 1.2 trillion euro in 2021, surpassing pre-pandemic levels by more than 10%. The United States remains the EU’s number one trading partner in services. Bilateral trade in services reached a record in 2021 and accounted for more than 500 billion euro.”
Tariffs
During Trump’s presidential campaign, he said he would impose tariffs on imports from several countries, including China, Mexico, Canada, and Europe.
He even suggested replacing federal income tax with tariffs of 10% to 20%. Europe, which exports more to the US than it imports, would be affected directly and indirectly.
In 2023, European exports to the US totaled €502.3 billion, while its imports, at €346.5 billion, were much lower. The balance was €155.8 billion in Europe’s favor. Tariffs would probably reduce trading volumes significantly and could even wipe out Europe’s surplus.
Even if the US aims tariffs just at China, European companies could still be affected. In today’s global economy, many European goods contain Chinese parts or technology.
US tariffs aimed at China would affect European trade with China. Companies would stop buying Chinese components for their products that were destined for the US.
Defense spending
What will happen if Trump decides to drastically reduce US support for Ukraine in its war against Russia? Europe would have to increase its military and economic aid to Ukraine considerably. Would it be willing to do so?
The US is a major contributor to the North Atlantic Treaty Organization (NATO). Trump may want to drastically cut support for NATO.
Steep increases in spending for NATO and Ukraine would impact European budgets, which are already stretched.
Some countries, such as the UK, will likely support higher defense spending to prevent Russia from taking Ukraine, but other nations, such as Hungary, might not be so keen.
If America scales down its support for Ukraine and Europe does not step up, Ukraine may have to negotiate some kind of ceasefire that includes giving up Crimea and perhaps other parts of the country. Would that embolden Russia to then go after Moldova or a Baltic state (Estonia, Latvia, or Lithuania)?
Conclusion
Whatever Trump and his administration decide to do, the possibilities described here will not happen all at once. They will take time. Europe, however, needs to start preparing for multiple scenarios now.