FRANKFURT, Germany — The European Union, America’s largest trade partner, is anxiously awaiting news on whether President Donald Trump will impose significant tariffs on its goods, a decision that economists warn could have far-reaching consequences for both American and European companies and consumers.
In early April, President Trump initiated a 20% import tax on all EU-made products as part of a broader effort to address trade imbalances that he perceives disadvantageous to the United States.
However, to calm financial markets and provide space for negotiation, he temporarily suspended the tariffs, lowering the rate to 10% until July 9.
Despite this pause, President Trump expressed dissatisfaction with the progress of trade talks and hinted at escalating the tariffs for European exports to as much as 50%.
Should such a high rate be implemented, it would lead to price increases for a variety of products—ranging from French cheese and Italian leather goods to German electronics and Spanish pharmaceuticals—in the U.S. market.
In response, the EU, which consists of 27 member nations operating as a unified economic bloc, has indicated its desire for a negotiated settlement with the Trump administration.
Should negotiations fail, EU officials have stated their readiness to retaliate with tariffs targeting hundreds of American products, which could include beef, auto parts, beer, and Boeing aircraft.
The stakes are considerable in these trade discussions. According to the EU’s executive commission, the trade relationship between the United States and the EU is seen as “the most important commercial relationship in the world.”
In 2024, the value of trade in goods and services between the U.S. and the EU reached 1.7 trillion euros (approximately $2 trillion), equating to an average of 4.6 billion euros daily, as reported by Eurostat, the EU’s official statistics agency.
The biggest category of U.S. exports to Europe includes crude oil, followed by pharmaceuticals, aircraft, automobiles, and medical equipment.
Conversely, Europe’s most significant exports to the U.S. encompass pharmaceuticals, cars, aircraft, chemicals, medical instruments, wine, and spirits.
President Trump has voiced concerns over the EU’s 198 billion-euro ($233 billion) trade surplus in goods, indicating that American consumers purchase more from European firms than vice versa.
However, American companies partially mitigate this imbalance by effectively competing in services, where the U.S. outperforms the EU in areas such as cloud computing, travel bookings, and legal and financial services.
As a result, the services surplus has reduced the overall trade deficit with the EU to 50 billion euros ($59 billion), representing less than 3% of total U.S.-EU trade.
Before Trump took office, the United States and the EU shared a more cooperative trade relationship marked by relatively low tariffs on both sides.
Tariffs were relatively low, averaging 1.47% on European goods entering the U.S. and 1.35% on American products into the EU.
Since February, however, the White House has taken a more confrontational approach towards its European allies.
Accompanying the shifting tariff rates on EU-made goods, the administration has imposed a 50% tariff on steel and aluminum as well as a 25% tax on imported automobiles and parts.
Key issues raised by the Trump administration include agricultural barriers and EU health regulations, such as bans on chlorine-washed chicken and hormone-treated beef.
Moreover, President Trump has criticized the value-added tax (VAT) levied by EU countries, which ranges between 17% and 27% at the point of sale.
Yet, many economists contend that VAT is trade-neutral as it applies equally to both domestic and imported goods and services.
The EU maintains that these taxes are not open for negotiation, as national governments set them through their own legislative processes.
Holger Schmieding, chief economist at Germany’s Berenberg bank, emphasized that the EU and its member states are not position to alter their internal market frameworks in response to U.S. demands, which he believes often stem from a misunderstanding of the EU’s operations.
Economists and businesses alike stress that heightened tariffs will inevitably drive up prices for U.S. consumers on imported products. Importers face the dilemma of deciding how much of the additional tariffs to absorb as reduced profits and how much to transfer onto customers in the form of higher prices.
For example, Mercedes-Benz dealers in the United States have indicated they are maintaining pricing for the 2025 model year “until further notice.” The manufacturer has some protection against tariffs due to producing 35% of its vehicles sold in the U.S. in Tuscaloosa, Alabama, yet they expect price increases in the future.
Simon Hunt, CEO of Campari Group, which is based in Italy, discussed potential price adjustments for their products, contingent on industry trends.
Hunt conveyed that prices may either increase or remain stable, depending on how competitors respond to any potential cost hikes, suggesting that maintaining competitive pricing could be a strategy to capture market share.
President Trump has argued that imposing stricter barriers on imports is a method to encourage a revival of American manufacturing.
Despite this argument, many companies have dismissed the notion, citing that any positive economic gains would take years to realize.
Nonetheless, some corporations have shown a willingness to relocate portions of their manufacturing processes to the U.S.
Bernaud Arnault, CEO of the luxury group LVMH, known for brands like Tiffany & Co. and Louis Vuitton, indicated at a recent annual meeting that they might consider increasing U.S.-based production to circumvent tariffs if negotiations do not yield favorable outcomes.
Arnault, who has previously attended President Trump’s inauguration, urged for Europe to engage in negotiations rooted in reciprocal concessions.
He remarked that if high tariffs are implemented, many firms will have no choice but to raise their domestic production levels in the U.S. to avoid such levies, attributing potential fallout to a lack of intelligent negotiation by Brussels.
Some forecasts imply that the U.S. economy could face a significant risk should talks collapse.
Research conducted by Bruegel, a Brussels-based think tank, suggests that without an agreement, the EU could experience a 0.3% decline in its gross domestic product, while the U.S. GDP could drop by 0.7% if President Trump enforces tariffs between 10% to 25% on imported European goods.
Given the intricate nature of the issues at hand, it’s likely that both parties will only be able to establish a framework agreement before Wednesday’s deadline.
This framework would likely maintain a base tariff of 10%, along with existing tariffs on automobiles, steel, and aluminum, until further details of a formal trade agreement can be finalized.
The prevailing expectation among analysts is that the U.S. government will negotiate deals involving a retraction of its harshest potential retaliatory tariffs beyond the 10% threshold.
However, the pathway to reaching this point is anticipated to be fraught with challenges.
Offering exemptions for specific goods could help pave the way toward reaching a mutually beneficial agreement, with the EU potentially easing some regulatory measures viewed as trade obstacles by the White House.
While such an outcome may be framed as a “win” for President Trump, economists stress that the primary victims of this protectionist approach will overwhelmingly be U.S. consumers.
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