Trump's EU tariff threat could cause economic damage beyond Europe

Time of India

26-05-2025

LONDON: Is it a negotiating tactic, a credible threat or a howl of rage?
President
Donald Trump
's threat to impose a 50% tariff on all goods coming into the United States from the
European Union
starting next weekend was the latest zag after several zigs on trade policy that have befuddled financial markets, businesses and political leaders around the world.
"No one was expecting this," said
Agathe Demarais
, a senior policy fellow at the European Council on Foreign Relations. "We essentially don't have a clue as to what it means."
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Whatever the strategy -- or lack of one -- the economic fallout on the American, European and global economies will be severe if Trump follows through.
Carsten Brzeski, chief eurozone economist at ING, a Dutch bank, warned that such tariff levels could lead to a dreaded combination of higher inflation and slower growth in the United States. Europe could be pushed into a recession, and global growth would fall.
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At the Kiel Institute for the World Economy, Julian Hinz, a trade researcher, calculated that U.S. economic growth would drop 1.5%.
The magnitude of this latest tariff jolt is significantly higher than the 20% "reciprocal" tariff that Trump announced for the European Union in April and later paused. (That figure would have been added on top of an across-the-board tariff of 10%.)
Many analysts said Trump's announcement was clearly a bid to pressure Europe, a region that he has treated with particular scorn. Yet they agreed that the president's Friday morning post on Truth Social had caused damage.
The scale of the increase in tariffs, the capricious manner in which they were threatened and the growing size of U.S. budget deficits are unsettling financial markets, said Neil Shearing, chief economist at Capital Economics. A week earlier, Moody's downgraded the U.S. credit rating, citing concern over Washington's ability to limit rising debt levels.
"This all points to concerns about policy direction in the U.S. lacking credibility," Shearing said, and that the "guardrails are coming off."
Companies across the board are already raising their assessments of the riskiness of investments in the United States, a sign that uncertainty is dimming the allure of investing in America, said Mary E. Lovely, an emeritus professor of economics at Syracuse University.
"One of the president's big goals is to increase investment," she said. "But who wants to do manufacturing here when the president at any moment might put high taxes on things that you buy to produce, and you might be subject to retaliation from the markets into which you will sell?"
The shift between oversize threats and reversals has become familiar. Trump imposed high global tariffs and then quickly postponed them when the bond market shuddered. He threatened China with exorbitant tariffs of 145%. When China hit back with a 125% tariff on U.S. goods, Trump took a step back. Two weeks ago, the two governments issued joint statements that they would suspend the highest tariffs for 90 days and negotiate.
That experience is likely to bolster Europe's resolve. "We've already seen what's happened with China, which is that he climbed down," said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and a former chief economist at the International Monetary Fund.
If you hit back hard, markets will get nervous, and the president will back off. "That's the message" that the Europeans have absorbed, he said.
But as several analysts pointed out, it's hard for the Europeans to negotiate when Trump has not made it at all clear what he wants.
And the notion that Europe could be pressured to quickly make concessions shows a deep misunderstanding of what it takes to reach a consensus among the European Union's 27 very different members.
Still, European officials have prepared a raft of countermeasures in response to higher U.S. tariffs. Roughly a fifth of EU exports go the United States, and about the same share of American exports go to the European Union.
"We're playing for big stakes here," Obstfeld said. "There's the ability of both sides to do substantial damage to the other."
In addition to wide-ranging tariffs on automobiles, food items and automobile parts, the European Union has threatened to put tariffs on the American services sector. That is a serious vulnerability since service industries like technology, finance and travel make up the bulk of the U.S. economy and European consumers are major users of them.
If Trump does end up imposing 50% tariffs on June 1, Ireland -- the European country with the most trade with the United States -- would be hit the hardest, with an estimated 4% decline in total economic output, according to Capital Economics. Germany's gross domestic product is projected to shrink by around 1.5%, Italy's by 1.2%, France by 0.75% and Spain by 0.5%.
To some degree, the policy swings coming out of the White House may simply depend on which adviser was the last to speak to the president, said Mark Blyth, a political economist at Brown University.
Given Trump's repeated claim that the European Union has long been "ripping off" the United States, it's worth remembering that in 2008, both had the same size economies, Blyth added.
Now, Europe's economy is one-third smaller. "How can you be ripping someone off," Blyth asked, "if you're a third poorer than them?"