This article was written by Thomas Scothern, First Year BSc Politics student and Academic Associate at the LSE UPR .
Background
The orange wave that began crossing the Atlantic late on November 5th is poised to make a sure landing on European shores in early 2025, and the economic ramifications are set to be dramatic and wide-reaching.
Trump has not made it a hidden component of his agenda that he dislikes trade deficits. Inciting a potential trade war, Trump proclaimed in October that the European Union would “pay a big price” for the $130 billion US-EU trade deficit. For two political unions bound together by joint commitments to NATO, the G7 and the G20 and natural alignments in a Western liberal democratic tradition, a provocation of a trade war may not be a natural inclination for a ‘standard’ politician. However, Trump’s first term set a precedent of unilateral imposition of tariffs on EU exports, with 25% on steel and 10% on aluminium, followed by retaliatory EU tariffs targeted at Harley Davidsons’ and Levi’s jeans. Therefore, Trump’s second term paints a picture of an escalation of tariffs if current rhetoric and past actions are anything to go by.
The current proposal from the incoming Trump administration is uncertain, but a 10% universal tariff seems to be the most consistent proposal. There have been two responses from the European heavyweights so far. The European Bank Chief, Christine Lagarde, has adopted a position of “not to retaliate, but to negotiate” in definitive contrast to the European Commission, which has drawn up proposals to impose duties of 50% or higher on American exports.
Trumpian trade policy is also uncertain and unstable. Trump has threatened to impose tariffs on Canada and Mexico, the European Union, China and a blanket global tariff. However, what is essential to note is that Trumpian tariffs are not just an economic tool, but rather a “weapon of diplomacy” to yield political ends. For example, the tariffs imposed on Mexico and Canada are aimed at tackling migration and drug policy. Therefore, Trump’s trade policy is likely to adapt as Trump’s policy agenda evolves.
The Tarrif Impact
Europe’s economy has preexisting structural concerns, with industrial gas prices 380% higher than that of the United States in 2024, an ageing population, and stagnating productivity growth. Therefore, the imposition of Trumpian tariffs would worsen an already structurally unsound economic climate.
The most pressing impact to hammer home is that the United States would experience a much greater hit than the European Union. According to an LSE Policy Paper from the Grantham Research Institute, the direct negative impact of tariffs on US Gross Domestic Product (GDP) would be six times greater than that on the EU, at -0.64% and -0.11% respectively. However, the variation of impact is highly heterogeneous between Member States and sectors, depending on exposure to the US market.
The German automotive sector is set to be caught particularly in the tailwinds of Trump’s trade policy. The sector has already been plagued by elevated energy prices due to the war in Ukraine, a slower-than-expected transition to Electric vehicles (EVs), and a wider global slowdown expected in car sales following a rebound after COVID-19. This multifaceted slowdown has already caused Voltzwagen to propose closing German factories for the first time in its history and cutting 10,000s of jobs. On top of all of this, Trump is now expected to place a 100% tariff on German automotive exports. The expected economic ramifications are clear, with German automotive company share prices declining between 4% and 7% the day after the US presidential election. The German automotive industry has particular exposure to the US market, with North America being Volkswagen’s largest market outside of its domestic continent and the United States being BMW’s second largest market. The precise impact of Trump’s tariffs is uncertain, but the industry will likely be “disproportionately affected” at a time when it is already facing an uncertain horizon.
A quirk of Trump’s tariff proposals is the cautionary net-gains for certain sectors of European industry. Trump has campaigned on a targeted 60% tariff on Chinese imports to the US. Therefore, European exports become relatively more price competitive in the US domestic market with French machinery, UK textiles and German chemicals set to benefit. However, these net-gains are localised and limited, and do not reverse the wider negative impact on the European economy that is expected.
Tariffs will likely not go unnoticed, with Trump’s unilateral tariff imposition likely to provoke a retaliatory response from the European Union, with the European Commission already drawing up a response plan. This could escalate into a fully-fledged trade war, with a mutually destructive impact on their respective economies.
Conclusion
In the end, nothing is certain. Trump’s tariffs proposals are just that: proposals. However, if they are enacted, the European economy will suffer a blow in an already unstable time of war on the continent. There is a potential of a trade war, which would only be mutually destructive. The path the Commission and the new administration chooses to take will be pivotal to the impact on their respective economies, but everything remains to be seen.
Cover Image: Donald Trump speaking at CPAC 2011 in Washington, D.C. by Gage Skidmore, licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license.
