A Dangerous Game with the Economy – Trump's EU Tariffs and the Looming Fragmentation of Global Trade

Frankfurt – It is the largest trade relationship in the world - and it is on the brink. On Monday, the European Union expects to learn whether U.S. President Donald Trump will make good on his threatened punitive tariffs on European products. The decision could severely disrupt economic relations between the U.S. and Europe - with massive consequences for consumers, businesses, and political stability on both sides of the Atlantic. As early as April, Trump imposed a flat import tariff of 20 percent on all EU goods, officially citing a trade imbalance. But hardly had the measure taken effect when he suspended it again - until July 9, with a "transitional tariff" of 10 percent to calm the markets and allow for negotiations. Now Trump is threatening another step: 50 percent tariffs on European exports - from French cheese and Italian leather goods to German electronics and Spanish pharmaceuticals. The EU Commission, responsible for trade policy for the 27 member states, continues to signal a willingness to talk. However, in the event of failure, Brussels has announced retaliatory tariffs on hundreds of U.S. products - including beef, auto parts, beer, and Boeing aircraft.

The economic dimension of this confrontation is immense. According to Eurostat, the bilateral trade volume in 2024 amounted to over 1.7 trillion euros - an average of 4.6 billion euros per day. The U.S. mainly exports crude oil, pharmaceuticals, aircraft, and cars to Europe. The EU, in turn, sends pharmaceuticals, cars, chemicals, medical devices, wine, and spirits to the United States. While Europe has a trade surplus of 198 billion euros in goods - this shrinks to about 50 billion euros when the U.S. surplus in the services sector is factored in, such as in cloud services, travel bookings, or financial services. Trump, however, focuses on the goods trade deficit - and on political symbolism. His administration's tone has sharpened significantly since his return to office in February. In addition to the new tariffs on EU goods, there are already 50 percent import duties on steel and aluminum and 25 percent on cars and car parts. One central point of contention remains agricultural policy: the U.S. demands access for products banned in the EU - such as chlorine-treated chicken or hormone-treated beef. European value-added taxes (17 to 27 percent), which Brussels claims are neutral, are also facing criticism in Washington. Yet the EU Commission points to its limited authority: many regulations and taxes are set by the member states and cannot simply be changed at Washington's request. "On consumer protection, regulation, and taxes, Europe cannot give ground," says Holger Schmieding, chief economist at Berenberg Bank. "The EU cannot reshape its internal market according to American demands - especially not based on false assumptions."

For many companies and consumers, a trade war could become expensive. U.S. consumers would have to expect rising prices. While importers could try to absorb some of the higher costs themselves - many are likely to pass them on. Mercedes-Benz dealers in the U.S. want to keep prices for 2025 models stable for now, but expect significant price increases in the coming years. Although the manufacturer builds around 35 percent of its vehicles in Alabama - that offers only limited protection. Other companies are considering relocations. Simon Hunt, CEO of the Italian Campari Group, indicated that the company could either raise prices on products like Skyy vodka or Aperol or aim for market advantages if competitors raise prices first. France's luxury goods giant LVMH, with brands like Louis Vuitton and Moët & Chandon, whose CEO Bernard Arnault attended Trump's inauguration, is considering shifting parts of its production to the U.S. should there be a surge in tariffs. "If Europe doesn't negotiate a smart solution, Brussels is to blame," said Arnault. According to Bruegel, a Brussels-based think tank, failure of the negotiations could hit the U.S. economy harder than the EU. A tariff rate of 10 to 25 percent would reduce U.S. GDP by 0.7 percent, and the EU's by 0.3 percent. The most likely outcome? A framework agreement that averts Trump's worst threats but leaves base tariffs of 10 percent as well as auto and steel tariffs in place for the time being. "The U.S. will probably retreat from the most extreme punitive tariffs," says Schmieding. "But the road to get there will be rocky." Small exemptions or regulatory concessions could help - but the price will be high. And in the end, says Schmieding, "it is the U.S. consumers who pay for Trump's protectionism."