Yesterday, Wednesday March 12, US tariffs on steel and aluminium came into force… In response, the European Commission announced plans to retaliate to a similar extent (albeit on different categories of imports from the US).
While the impact on some sectors and products may be large, the overall macroeconomic impact on Europe is expected to be small. The most worrying thing is that this is only the beginning – Europe is now clearly in Donald Trump’s crosshairs, as it is the US’s largest trading partner in terms of imports.
Trump’s statements from the White House confirmed this: “I am not happy with the EU, I will impose tariffs on real estate, we will win this economic war”.
In this context, the macroeconomic forecasts for Europe, based on the scenario that the US will eventually impose 10% tariffs on Europe, with the EU responding with corresponding countermeasures, include:
The initial move
The European Union announced this morning “proportionate” countermeasures, imposing tariffs on US products entering the EU, in response to Donald Trump’s decision to impose 25% tariffs on global aluminium and steel imports into the US.
The US tariffs, which have already entered into force, are based on those imposed by Trump in 2018, but with two important differences:
i) The rate for aluminium has been increased from 10% (2018) to 25%.
ii) The new tariffs are broader-based, as they affect more finished products, not just raw materials.
Overall, the US tariffs will affect European exports to the US worth around €26 billion, which is around 5% of all EU exports to the US market.
Europe’s reaction
In response, the European Commission announced that it would take countermeasures in two phases:
- In early April, it will reintroduce tariffs imposed during Trump’s first term.
- From mid-April, it will apply tariffs to an additional set of US imports.
- To this end, the Commission will hold consultations over the next two weeks on the list of products (industrial and agricultural – not just Harley-Davidson and bourbon) on which it may impose tariffs.
- The EU’s intention is to impose countermeasures worth €26 billion on US imports.
Macroeconomic implications for Europe
According to Trust Economics, the European Commission has estimated that additional US tariffs on European aluminium and steel exports will cost US importers up to €6 billion more.
- If the EU seeks to raise corresponding tariff revenues in response, then this cost must be seen in relation to overall trade:
- The €6 billion additional cost of imports, relative to total US imports of goods into the EU (of $375 billion in 2023), is significant – around 1.7%.
- The €6 billion relative to total imports of goods from outside the EU (of $2.4 trillion in 2024), is limited – around 0.25%.
- The €6 billion relative to total nominal EU GDP (of €18 trillion in 2024), is negligible – around 0.03%.
- Therefore, although at the sector and product level these tariffs and countermeasures will be noticeable (through:
- Reduced demand from the US for European steel and aluminium products – unless European manufacturers reduce their prices, absorbing the losses.
Increased prices in Europe for specific imported products, the impact on the European economy as a whole is expected to be small.
The biggest impact will come from future measures
There are even more significant and worrying potential tariffs to consider.
- The tariffs Trump has announced so far are, after all, just the beginning.
- Trump is less than two months into his presidency, and Europe is now clearly in his crosshairs – perhaps even more so after today’s EU response.
- Indeed, the EU exports over €500 billion in goods to the US each year, making it the largest trading area with the US (exporting more than Canada, Mexico or China).
- At the same time, the US trade deficit with the EU has increased significantly in recent years
Trump is likely to announce new tariffs on April 2, before Europe’s response to steel and aluminum tariffs even takes full effect. Moreover, significant impacts on global – and European – growth could occur even before major tariffs are implemented. This could happen because of the increasing uncertainty in trade policy and geopolitical instability caused by the Trump presidency.
