Summary
The ongoing trade relationship between the United States and the European Union, considered the largest commercial relationship globally, is currently in a state of tension due to potential U.S. tariffs on EU imports. The prospect of such tariffs, discussed in the European Parliament in early 2021, has introduced a level of uncertainty in the EU’s trade relations with the U.S., potentially affecting European competitiveness and economic growth. In response, the European Union has actively engaged in trade and tariff negotiations with the U.S., focusing on an agreement that would remove tariffs on industrial goods, excluding agricultural products.
At the same time, the EU is also preparing for a possible escalation of tariffs from the U.S., offering a “zero-for-zero” tariff deal, but also preparing to retaliate with a 25% tariff on some U.S. imports. This approach, along with ongoing negotiations, forms part of the EU’s strategy to navigate the complex global trade landscape. Notably, the European Commission and French Trade Minister Laurent Saint-Martin have expressed a preference for a mutually beneficial trade agreement over a tariff war.
The imposition of potential U.S. tariffs may significantly impact key sectors within the European Union, such as the automotive industry, potentially affecting 13.8 million European jobs tied to the industry. Such tariffs could also disrupt many EU firms’ global supply chains and postpone investment decisions. In response to these potential impacts, the EU’s strategy has focused on negotiation and strategic retaliation, with EU Trade Commissioner Maroš Šefčovič emphasizing the preference for negotiation over retaliation.
Despite these tensions, the EU-U.S. trade relationship remains robust, reaching €1.6 trillion in trade of goods and services in 2023. Amidst this, the EU continues to engage in other trade opportunities globally, such as concluding a Digital Trade Agreement with the Republic of Korea, signaling a dynamic approach to managing its trade relations in a globally connected economy.
Background
The transatlantic trade relationship between the United States and the European Union is considered the most important commercial relationship in the world, with a combined trade in goods and services reaching an impressive €1.6 trillion in 2023. This bilateral trade and investment relationship is also the world’s largest, making the EU and the US each other’s most significant trading partners. This relationship extends to energy security as the EU is the largest buyer of US natural gas and oil.
However, there are concerns within the European Union about potential tariffs from the United States on imports. In February, European Parliament members discussed the threats of tariffs from the Trump administration. The potential imposition of these tariffs could make products from EU companies more expensive, and as a result, could negatively impact sales. The prospect of higher tariffs has introduced a level of uncertainty in the region’s trade relations with the US, which could potentially undermine European competitiveness and pose a headwind to growth.
Simultaneously, US tariffs have been applied on imports of steel articles from Japan, which could have implications for the European steel industry. These imports are subject to a tariff rate quota, and may also face anti-dumping and countervailing duty, further complicating the transatlantic trade landscape.
Current Negotiations
The European Union (EU) has been actively involved in several negotiations regarding trade and tariffs with different regions across the globe. A landmark Digital Trade Agreement (DTA) was concluded between the EU and the Republic of Korea, signaling both parties’ commitment to keeping pace with rapid digital developments. In addition, there has been Civil Society Dialogue regarding the evaluation of the Agreement between the European Union and Japan for an Economic Partnership (EPA).
The focus of the EU’s negotiations with the United States has been on an agreement that would strictly remove tariffs on industrial goods, excluding agricultural products. This negotiation also includes an agreement on conformity assessment, designed to address the removal of non-tariff barriers. Amidst these ongoing negotiations, the EU has been bracing for a potential escalation of tariffs from the United States. The European Commission expressed a clear preference for engaging in negotiations with the Trump administration to establish a trade agreement that is both balanced and mutually beneficial. French Trade Minister Laurent Saint-Martin echoed these sentiments, stating that a tariff war would be detrimental to all parties involved.
In an attempt to avert a potential trade war with the U.S., the European Commission offered a “zero-for-zero” tariff deal. However, it was also prepared to retaliate with a 25% tariff on some U.S. imports. This approach, coupled with active negotiations, forms part of the EU’s strategy in navigating the increasingly complex global trade landscape.
If the US continues to raise tariffs, the EU’s first likely course of action would be negotiation. The introduction of additional tariffs would undoubtedly put a damper on economic growth. However, these circumstances could lead other countries to seek closer ties with the EU, counterbalancing the US’s approach and potentially leading to more consumer choice, lower prices, and increased trade and jobs.
Anticipated Impact on Key Sectors
The European Union’s automotive industry, a critical sector for the region, is expected to face significant challenges due to potential US tariff impositions. It is estimated that 13.8 million European jobs tied to the industry could be affected, including 11.2 million indirectly involved in the broader EU automotive ecosystem. Combined with factors such as reduced export demand, increased input costs, and shrinking profit margins, the EU automotive industry could face a “perfect storm” of economic challenges. According to a study, countries that are part of the ‘EU manufacturing core’ and heavily specialized in automotive industry value chains, like Slovakia, Hungary, Germany, Sweden, Czechia, and Austria, could experience significant economic impact.
The uncertainty surrounding tariffs could cause companies to postpone investments, further dampening economic growth. EU trade commissioner Maroš Šefčovič emphasized the EU’s preference for negotiation rather than dollar-for-dollar retaliation. In the event of stalled negotiations, the EU has shown a willingness to implement retaliatory measures, with options for relatively pain-free tariffs for Europeans narrowing.
There is also a potential impact on industries that rely on imported goods. The EU has not yet released a definitive list of products that will be affected by the new tariffs, but a draft document indicates that a wide range of goods, including poultry, grains, clothing, and metals, could be impacted.
Tariff Strategies and Objectives
In response to the U.S. imposing 25% duties on various goods including metals, poultry, grains, and clothing, the European Union (EU) has taken decisive actions to protect European businesses and consumers. According to the European Commission (EC), the first tranche of tariffs on U.S. imports was expected to start being collected from April 15, with a second set following on May 15.
In a bid to further shield its market, the EU has considered employing its Anti-Coercion Instrument, which would allow it to target U.S. services or limit U.S. companies’ access to EU public procurement tenders.
Counter-tariffs are seen as a reactive measure to the U.S. tariffs. Despite the potential economic implications, the EU maintains that it is capable of resisting, retaliating, and protecting its key sectors.
It should be noted that the U.S. also imposed a one-month reprieve for goods traded under the United States–Mexico–Canada Agreement (USMCA) until April 2, suggesting that exports from its North American neighbors might be spared. The potential impact of USMCA tariffs is deemed to be substantial enough to potentially lead to economic downturns.
Potential Impact on Specific Industries
The ongoing tariff negotiations and potential escalation of trade restrictions between the U.S. and the European Union could have significant impacts on various industries. Among the most impacted countries are Mexico, Canada, Japan, Slovakia, and South Korea. Slovakia, in particular, is expected to face substantial impact due to its large exposure to the automotive industry.
In addition to the automotive industry, both the U.S. and the EU have heavily targeted the agricultural and food sector in their tariff lists. The EU’s tariff list includes machinery and automotive goods that are used in agriculture, such as tractors and shovel loaders. Tariffs can also impact the balances of Tariff Rate Quotas (TRQs), which allow a predetermined quantity of a product to be imported at lower duty rates than normally applicable. Changes in tariff rates could affect TRQ allocations and thereby influence industries dependent on these quotas. For instance, the 2022 Third Quarter Tariff Rate Quota for Steel Mill Articles of EU Member Countries has been affected.
As the situation continues to evolve, industries on both sides are bracing for the potential consequences of further tariff impositions.
The content is provided by Sierra Knightley, Fact-Nest
