Trump tariffs’ effect on the EU

While Donald Trump debates sweeping “reciprocal” tariffs on dozens of countries worldwide, the European Union responds decisively. The question now, however, is how these tariffs might affect the EU and its citizens.

Yesterday, Trump implemented the long-announced tariffs but immediately later announced a 90-day pause on tariffs except for China, where the president’s 125% tariff took effect. The EU had immediately retaliated with 25% general tariffs on all U.S. goods. 

The EU’s retaliatory tariffs target a wide range of US products, such as poultry, orange juice, rice, tobacco, soybeans, aluminum and steel, luxury yachts, motorcycles, diamonds, makeup products, and clothing, affecting trade totalling $22 billion per year.

“The EU considers US tariffs unjustified and damaging, causing economic harm to both sides and the global economy,” said European Commission (EC) President Ursula von der Leyen in an EC statement. 

However, the EC had also said its countermeasures could be suspended at any time if Washington agreed to a fair and balanced negotiated outcome.

Initial European market tariff after-effects

The first effect of Trump’s trade war escalation measures in the EU was that shares slumped by about 2% during the first hours of April 9.

For example, the pan-European STOXX 600 (.STOXX), slumped 2.4% at 07:49 GMT, after the previous session’s rally ended weakly. At  10:00 GMT, the losses widened. The STOXX 600 had fallen 2.96%, and by midday, the decline hovered over 3.20%

Euro STOXX 50 was down 2.54% early in the session, but by 1200 GMT it neared 2.85%. France’s CAC 40 declined 2.53% to 6,935 and continued its descent by 3.78% to 6,830 by midday.

“The trade-sensitive Germany’s benchmark index (GDAXI), fell 1.7%,” while the STOXX 600 currently sits at about 15.5% below its all-time closing high and very close to the 20% threshold that would confirm a bear market, Reuters said.

Thanks to Trump’s tariff reversal on Thursday, STOXX Europe 600 rebounded 5.12 per cent, Euro STOXX 50, 5.4 per cent, and France’s CAC 40 soared 6.1 per cent. 

 What EU citizens can expect 

Trump’s tariffs on the EU could lead to deflation or lower prices in Europe, as US duties could also increase supplies from China and the European Union.

“One of the factors that will lead to lower prices in the EU will, of course, be exports from countries like China, which are now being redirected towards Europe,” Niclas Poitiers, a researcher at the Bruegel think tank, recently told Euronews.

Poitiers said a second factor remains in the market, explaining that if you currently have high customs tariffs on Italian wine, more of that wine would stay closer to home, leading to a price drop.

However, lower prices appear excellent for purchasing power, consumption stimulation, and growth, which could lead to deflation, adversely affecting the EU’s economy. Why? When prices begin to fall, people tend to hold off on purchases in hopes of further price drops.

The Bank of Spain explains that while lower prices may seem reasonable, they can create a vicious economic circle by driving down spending and investing, leading to lower economic growth and higher unemployment.

Tobias Gehrke, a researcher at the European Council on Foreign Relations (ECFR), told Euronews that uncertainty is perhaps the greatest risk to the economy and agreed that it could negatively affect employment and growth in a few months or years.

“These customs duties are generalised. All products, all exports from Europe to America will be affected. Think of machinery, chemicals, and cars. These companies may now face a burden”, Gehrke said.

Economic downturns, recessions, and recoveries are mostly impossible to predict accurately, as no one, not even economists, has a crystal ball. So it’s best not to panic, but it’s okay to always prepare for worst-case scenarios.