Should EU fear a trade war with America?

Now that we know that Donald Trump will be the next US president, many businesses across the European union fear punitive tariffs which could lead to a trade war. As history has shown, whenever there has been a trade war, there are usually no winners, just losers.

Are European companies and governments overreacting or should the they prepare themselves as best they can?

During his election campaign, Trump said he would add a 10% tariff on all imports into America in a bid to bring manufacturing jobs back. He then raised the global tariff to 20% and pledged to place a whopping 60% on all goods coming from China.

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Trump Reciprocal Trade Act

According to Trump, Americans buy millions of European cars, but Europeans don’t purchase American cars or farm products. “No, no, no. They are going to have to pay a big price,” he threatened.

Trump said that if he became president, he would introduce the “Trump reciprocal trade act,” which basically means that America will treat the EU like the EU treats America. That is, buy less stuff from outside.

When reporters asked him whether he was worried about starting a trade war, he said America would benefit.

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EU’s Trade Surplus with the US

It is true that the European Union exports much more to the US than it imports. It has had a trade surplus with the United States for several decades, consistently exporting more to the US than it imports.

In 2023, for example, the EU’s trade surplus with the US reached €43.6 billion, a record high. In fact, since the European Union’s formation on November 1, 1993, with the signing of the Maastricht Treaty, the US has consistently had a trade deficit with the EU.

So, why has trade always been in the EU’s favor? Some economist offer the following reasons:

• Economic Structure

Both the EU and US are service-based economies, but the service sector forms a smaller proportion of the EU’s economy than it does in the US, while manufacturing represents a larger proportion.

According to the World Bank, services represent 77.6% of the US economy and 64.8% of the EU’s, while manufacturing makes up 11% of the US economy and 23.8% of the EU’s.

Since the US has a smaller manufacturing sector and a larger emphasis on services (which are less traded internationally), it imports more manufactured goods from the EU than it exports.

• Market Preferences

The EU exports high-value goods like luxury cars and pharmaceuticals, which are in strong demand in the US.

• Trade Barriers

The EU’s strict regulations, especially in agriculture, make it harder for American goods to enter, compared to the easier access EU products have in the US.

Europe, for example, has stringent regulations on genetically modified organisms (GMOs). Many American agricultural products are genetically modified, which limits their import into the EU.

• Subsidies

Differences in subsidies between the US and EU may favor European exports.

The EU spends 44% of its whole budget on the Common Agricultural Policy (CAP), that is, agricultural subsidies. The US also has farm subsidies, but the structure is different and the amount much lower. America’s agricultural subsidies do not give the same level of export advantage.

Some economists disagree with these arguments and say that the reasons are much more complicated.

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EU Reminds Trump of the Transatlantic Agenda

On November 5th, 2024, European Commission President Ursula von der Leyen congratulated Donald Trump on his election victory, emphasizing the shared transatlantic values between Europe and the United States. She stated:

“I warmly congratulate Donald J. Trump on his election as the 47th President of the United States of America. I look forward to working with President Trump again to advance a strong transatlantic agenda.”

“The European Union and the United States are more than just allies. We are bound by a true partnership between our people, uniting 800 million citizens. This bond runs deep, rooted in our shared history, commitment to freedom and democracy, and common goals of security and opportunity for all.”

“Let us work together on a transatlantic partnership that continues to deliver for our citizens. Millions of jobs and billions in trade and investment on each side of the Atlantic depend on the dynamism and stability of our economic relationship.”

The letter from von der Leyen highlights America’s and Europe’s shared values and their importance, despite concerns about trade disputes and a potential trade war.
She hopes to build on this partnership.

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Nobody Wants a Trade War

• Problems for Europe

A 20% tariff on EU exports to the US would pose major problems for Europe, especially Germany, economists say. The EU would definitely respond with counter-tariffs until the two giant economic powerhouses risk a full-scale trade war.

According to Clemens Fuest, President of the ifo Institute, a Munich-Based economic think tank, a 20% duty on German goods would reduce the country’s exports by approximately 15%. The economic damage for Germany alone would be €33 billion ($35 bn).

Lisandra Flach, Director of the ifo Center for International Economics, said:

“We must be prepared for the US to distance itself further from open, global cooperation. Germany and the EU must now strengthen their position through measures of their own. These include deeper integration of the EU services market and credible retaliatory measures against the US.”

• Tariffs are Bad for America

If Trump arbitrarily imposes high tariffs on imports, he would likely hurt the US economy. The cost of goods for American consumers and businesses would increase, leading to higher inflation, lower consumer spending, and reduced profits for companies that rely on imported materials and products.

Tariffs may also trigger trade wars, harming American exports and overall economic growth.

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Will Trump Slap Tariffs on EU Goods?

Many newspapers remind us that during his presidency from 2016 to 2020, Trump had promised to take several actions that never materialized, such as imposing hefty tariffs on EU exports. Logically, we could assume that the same could happen again.

However, he now has much more experience and has been planning this for quite some time. If he chooses the right team to implement his strategy, we could also assume that things might turn out differently this time. We will have to wait and see.