EU economies brace as Washington and Brussels trade tariffs

Weeks of phony war ignited into open conflict last week after the Trump administration imposed blanket tariffs of 25% on all steel and aluminium imports. The levies will impact EUR 26 billion in EU exports, or around 5% of total EU goods exports to the US. The economic impact on the EU is considered manageable in the short term.

In response, the EU announced a series of “strong but proportionate” countermeasures. As a first step it will impose EUR 4.5 billion worth of levies on US goods, including steel and aluminum products, textiles, home appliances, motorcycles and bourbon whisky. Additional tariffs worth EUR 18.5 billion are in the pipeline.

Despite its bellicose response the EU has signalled its willingness to negotiate, and President Trump’s use of tariffs can be unpredictable. “Trump tariffs” have already been imposed and then paused on a range of goods from Canada and Mexico.   

Nevertheless, as things stand duties on other European goods are expected, followed by further EU retaliation. In the rest of this article, we’ll explore the potential consequences for EU economies and two of its major industries. 

Trump’s trade policy is nothing if not erratic

Are new US tariffs for the long term, or part of a negotiating strategy? Nobody can know for sure. President Trump has a history of announcing tariffs that are later paused, postponed or only partially applied. 

At the same time, the US President has long railed against what he sees as unfair EU practices, and tariff hikes were a cornerstone of his election campaign. With that in mind, our assumption is that tariffs will fluctuate between 10% and 25% on a range of EU imports in 2025. 

We think the EU will continue to retaliate in kind. Compared to its cautious stance during President Trump’s first term in office, EU leaders seem prepared to retaliate quickly and forcefully in the hope of forcing the US to negotiate. The reaction to the latest metal tariffs is a case in point.

Tariff threats and the rise of uncertainty

President Trump doesn’t follow through on all of his tough tariff rhetoric, but the threat alone can damage economies. The possibility of tariffs increases uncertainty, and companies are less likely to invest for a future that feels impossible to predict.

“In an uncertain environment, firms might be reluctant to invest if there's a risk of weaker demand in future – or they might delay capital spending with large upfront costs until the uncertainty subsides,” says Theo Smid, economist at Atradius.

Greater uncertainty can translate into higher credit spreads that further reduce incentives to invest. According to Oxford Economics, a blanket 10% US tariff on EU goods would see the level of business investment in the eurozone fall by almost two percentage points by the end of 2027.

No hiding place from tariff hikes

The threat and reality of tariffs are particularly damaging to transatlantic commerce because the US is the EU’s largest export market. We’ve already lowered our eurozone GDP growth forecasts by 0.3 percentage points, to 0.9% for 2025 and 1.2% for 2026.

But EU countries will not be impacted equally. “The most open economies and those most exposed to US trade flows will generally be hit harder,” says Smid. “Among the large EU countries, we expect tariffs and related uncertainty to weigh more heavily on Germany.”

Specifically, we predict that the German economy will grow by just 0.1% in 2025, 0.5 percentage points less than what might otherwise be expected. 

Central Eastern Europe (CEE) countries may also be significantly affected, due to high supply chain integration and a less diversified industrial sector. We expect US tariffs to hit sector output (both manufacturing and non-manufacturing) hard in Slovakia (-3.4%), Hungary (-2.6%), Czech Republic (-1.5%) and Poland (-0.9%). 

Spillover effects impact wider economies, as struggling manufacturers cut back on services and worried consumers put big ticket purchases on hold.

Manufacturing in the firing line

Service sectors feel the impacts of tariffs eventually, but manufacturers are first in the firing line. According to Oxford Economics, a US 10% blanket tariff would trigger a 2% contraction in EU aggregate manufacturing output in 2025. Pharmaceuticals and automotive would be among the hardest hit sectors. 

Bad medicine for pharmaceuticals

The EU pharmaceutical sector is highly exposed to US tariffs. Exports of final goods to the US accounted for 14.7% of gross pharma output in 2023. But the equivalent figures for the biggest pharma-exporting countries like Ireland (40%) and Denmark (30%) are considerably higher. 

Denmark is in the uniquely invidious position of being a focus of the Trump administration’s territorial ambitions. “Denmark´s pharmaceutical sector could suffer if President Trump imposes tariffs on specific Danish goods to pressure Denmark into ceding control of Greenland to the US,” says Rubén del Río, team leader at the Large Buyer Unit at Atradius CyC and Atradius pharmaceuticals sector specialist for Europe. 

“Novo Nordisk, whose launch of weight-loss drugs Ozempic and Wegovy are responsible for the rapid increase in Denmark's pharmaceutical production since 2022, could be a clear target”. In 2024, 58% of Novo Nordisk’s net sales were attributed to the US. While the company manufactures a large proportion of its drugs sold in the US locally, tariffs could curb production in Denmark.

Ireland might be in an even worse position. Pharmaceuticals make up a significant part of its large trade surplus with the US (EUR 50 billion in 2024) and Ireland also hosts manufacturing operations of US-based drug makers like Johnson &Johnson, Pfizer and Eli Lilly. 

President Trump has threatened to use tariffs to force the reshoring of pharmaceutical manufacturing in the US, and recently accused Ireland of “stealing” the US pharmaceutical industry. If he goes ahead, these major industry players could jump ship or slash the output of their Irish operations. 

“A sharp decline in exports caused by the imposition of tariffs on pharmaceuticals to the US would not only affect Ireland's trade surplus but also have broader implications for its economy, given that pharmaceuticals constitute a major segment of its manufacturing output,” says Del Río. 

Automotive in the slow lane

The US is the number one export destination for EU-made cars, leaving the industry highly vulnerable to tariff threats. In 2023, 20% of the EU’s automotive export value came from US sales.

The German and Italian automotive industries, and supply chains in CEE countries, are most at risk. 

“The combination of reduced export demand, higher input costs, and shrinking profit margins would severely hurt the competitiveness of the German and CEE automotive industries, already under pressure due to a subdued business performance and increased credit risk,” says Jens Stobbe, manager at Atradius Risk Services Germany.

We estimate that German and Italian automotive exports could fall by over 5% in 2025 as a result of US tariffs. Spanish and French counterparts are less dependent on US sales, and are projected to experience smaller declines of around 2%. 

Fresh US tariffs are exactly what EU automakers don’t need at the moment. After a 5.7% year-on-year decline in 2024 we currently expect German automotive production to contract again in 2025 and 2026, by 4.1% and 0.4% respectively. Italian automotive production suffered a massive 21% contraction in 2024, and is predicted to rebound by just 2.5% this year.

Redirecting exports to other markets is, at best, a partial solution. “Differences in market demand and consumer preferences, logistical barriers, regulations and rising competition from the likes of China and South Korea mean it is unlikely that lost US sales can be fully offset in the short term,” says Stobbe.

There are no winners in a trade war

None of this is inevitable, yet. With weeks to go before the first EU countermeasures kick in on 1 April, there’s still hope that the two sides can negotiate a route away from a full scale trade war. 

But the latest signs are not good. US steel and aluminum tariffs are here and the EU has announced a package amounting to almost dollar-for-dollar retaliation. Only last week, President Trump repeated that he had a “problem” with the EU. Nothing is certain in the new economic reality, but pulling back from the brink will take a level of compromise that neither the Trump administration nor the EU currently appear ready to accept.