Estimated time of reading: ~ 6 minutes

Following Donald Trump’s victory in the US presidential election, significant shifts are expected in the economic relationship between the European Union and the United States. As the world’s largest bilateral trade and investment partnership, with trade reaching €1.2 trillion at its peak in 2021, both sides face high stakes.

Europe’s immediate concern lies in potential new tariffs, as Trump has floated the idea of replacing federal income tax with tariffs ranging from 10% to 20%. While such a sweeping measure is unlikely, even limited tariffs could substantially impact EU-US trade. Sectors like steel, vehicles, cheese, and wine may see reduced competitiveness in US markets. The automotive industry is especially vulnerable since the US is the second-largest market for EU vehicles. Tariff-related uncertainty alone could dampen investment and business planning, creating a chilling effect beyond the tariffs themselves.

Europe may also get caught in US-China trade tensions. Even if tariffs aren’t directly imposed on European goods, European companies could suffer if the US applies sanctions on products incorporating Chinese parts or technology, or if it pressures Europe to reduce its economic ties with China. This could affect industries like telecommunications equipment and automotive manufacturing, given that China is the EU’s second-largest trading partner.

Economic forecasts are already being adjusted. Economists at Goldman Sachs predict a 0.5% reduction in eurozone GDP growth due to Trump’s potential policies, with Germany expected to feel the brunt given its export-heavy economy. In response, the European Central Bank (ECB) may adjust monetary policy, with a forecast reduction in the terminal deposit rate from 2% to 1.75% by July 2025. While lower interest rates could boost output, they may also raise inflationary pressures.

Trump’s presidency might also increase European defense spending, spurred by his criticisms of NATO and possible reductions in US support for Ukraine. This could boost growth in defense-related sectors, though the overall economic impact may be limited given modest military spending multipliers in Europe. At the same time, currency markets could feel the effects of divergent US and EU monetary policies, with possible dollar strengthening if US inflation spikes, which would have complex effects on trade balances.

Despite these challenges, opportunities for cooperation exist. The EU can pursue dialogue to close regulatory gaps with the US, for instance, through the EU-US Trade and Technology Council (TTC). Aligning regulations could encourage more European firms to adopt US technologies, potentially helping to boost EU productivity. Furthermore, a strong US economy may mitigate some effects of austerity and stagnant consumption in Europe, creating positive spillovers for the EU.

The economic relationship between the EU and the US under a second Trump term may be marked by uncertainty and trade tensions, but it also opens opportunities for Europe to reassess its economic strategies and strengthen transatlantic cooperation in technology, innovation, and other key areas. The EU should aim to protect existing trade relations while proactively addressing its priorities, such as promoting growth, advancing the green transition, and bolstering economic security. The coming years will be challenging, but with strategic planning, both sides can work together to maintain this essential economic partnership.

Written by: Nenad Stekić