Europe’s worst-case scenario for transatlantic economic relations became more tangible this week after President-elect Donald Trump signaled he would use U.S. trade power as leverage in foreign policy. His threats to impose tariffs on countries like Canada, China, and Mexico due to illegal drugs and migration issues sent European stocks tumbling, particularly affecting companies such as Stellantis NV and Volkswagen AG, whose vehicles could be vulnerable in a trade conflict with Washington.
Trump’s rhetoric highlighted how he might approach the European Union (EU) by imposing or threatening tariffs based on policy disputes that extend beyond protecting domestic industries. The president-elect has previously stated that the EU treats the U.S. worse than China in terms of trade relations.
“Europe needs to be prepared,” warned Penny Naas, a global public policy expert at the German Marshall Fund, during an interview. “This seems like the starting signal for what they should expect in the not-too-distant future.”
The euro initially rose against the U.S. dollar after Trump’s remarks, recovering slightly from a two-year low, as there was initial relief that he had not directly targeted European trade. However, the currency’s gains were short-lived, and European stocks continued to decline, while the region’s bonds outperformed global peers.
The EU was caught off guard in 2017 when Trump imposed tariffs on European steel and aluminum, citing national security concerns. In response, the 27-nation bloc had to act quickly to protect its companies and introduce retaliatory measures. Since then, the EU has adapted its trade policy, becoming more assertive in its approach and expanding its economic strategies to counter coercive tactics from both geopolitical adversaries and allies, including the U.S.
German Foreign Minister Annalena Baerbock expressed the EU’s readiness to face a more protectionist U.S. administration. “If the new U.S. administration pursues an ‘America First’ policy in sectors like trade or climate, our response will be ‘Europe united,’” she stated after a Group of Seven meeting in Italy on Tuesday.
In response to the shifting global landscape, the European Commission, the EU’s executive body, introduced a new economic security strategy earlier this year. The strategy aims to safeguard the bloc against coercive economic actions by external powers such as China, Russia, and the U.S., leveraging the EU’s vast single market to push back against unjustified economic restrictions.
The EU has also bolstered its trade defenses by adopting a new anti-coercion instrument, which enables it to retaliate with tariffs or other punitive measures against countries using economic restrictions for political gain. Additionally, the EU introduced a foreign subsidies regulation that can block foreign companies benefiting from unfair state subsidies from participating in public tenders or mergers within the EU.
The threat of a potential trade war has unsettled markets, with expectations of increased instability and uncertainty for Europe. According to George Saravelos, global head of FX research at Deutsche Bank, the complex web of supply chains means that European companies will still be impacted by tariffs on countries like Mexico—even before considering the possibility of U.S. tariffs targeting Europe. He noted that Trump’s focus on tariffs as an economic and geopolitical tool signals their likely use in future negotiations.
“Tariffs are clearly at the top of the Trump agenda,” Saravelos said. “We see an implicit signal that they are likely to be used as a broad-based economic and geopolitical tool in this administration.”
Investor sentiment has been negative toward Europe since the U.S. election, with fears that the region will be particularly vulnerable to Trump’s policies. Many analysts predict the euro could slide towards parity with the dollar, and European stocks may continue to underperform U.S. counterparts. Some investors are taking a cautious approach, waiting for more clarity on Trump’s policies and their potential impact on Europe.
“I’m being a bit more cautious, and I’m not making major macro bets on Europe whether it’s in equities or bonds,” said Julius Bendikas, European head of macro and dynamic asset allocation at Mercer. “Right now there’s still a lot of uncertainty, and we have to take a few pages from the 2016 playbook — at that point being a little cautious was the right thing to do.”
Trump has expressed multiple grievances against the EU, including criticism of its defense spending and the U.S.-EU trade deficit. His previous remarks have been harsh, once describing Brussels as a “hellhole” and even suggesting he would let Russia act freely if NATO members didn’t meet defense spending targets.
Despite the EU’s expanded toolbox to respond to potential trade conflict, Naas cautioned that the question remains whether the 27 member states can stay united in the face of U.S. pressure. “Indeed, Europe has more tools,” Naas acknowledged. “But the question has always been: Is Europe prepared to go on offense as opposed to defense?”
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