The European Union (EU) is facing a potential trade dispute with the United States as President Donald Trump considers imposing reciprocal tariffs. Eric Lascelles, Chief Economist at RBC Global Asset Management, notes that while no single European country ranks among the top three U.S. trading partners, the EU collectively is the largest consumer of U.S. products and maintains a trade surplus with the U.S.
Trump's proposal for reciprocal tariffs aims to match tariffs charged by trade partners, which could significantly impact the European economy more than recent targeted tariffs on steel and aluminum imports. These measures are part of an effort to rectify what Trump views as an unfavorable balance of trade.
U.S. trade officials are reviewing all trade partners' tariffs and non-tariff barriers such as regulations and subsidies. They will also consider whether the value-added tax (VAT) system should be seen as an additional tariff on U.S. exports. The VAT accounts for about one-fifth of EU tax revenues and is unlikely to decrease.
Findings from this review are expected by April 1, with potential reciprocal tariffs reaching up to 25 percent if VAT rates are included. This could negatively affect the European economy depending on how long such tariffs remain in place.
The Trump administration has already imposed 25 percent tariffs on steel and aluminum imports starting March 12, 2025. Lascelles suggests these targeted tariffs may have a limited economic impact but could persist indefinitely due to their role in funding tax cuts and protecting American businesses.
The EU's response strategy involves using its Anti-Coercion Instrument (ACI), established in 2023, which allows for quicker countermeasures against coercive economic policies through a qualified majority vote among member states. Potential responses include increasing U.S. liquified natural gas imports or boosting military spending while offering concessions like lowering trade barriers.
European policymakers favor negotiations over retaliation, with European Central Bank President Christine Lagarde advocating for talks and Friedrich Merz suggesting continued free trade discussions before Trump's inauguration.
In past similar situations, such as in 2018, Europe successfully de-escalated tensions by increasing purchases of U.S. goods and imposing measured retaliatory tariffs worth half the amount targeted by the U.S., focusing on specific American products like whiskey and motorcycles.
Europe's economic recovery faces challenges from these tariff threats amid Trump's goal of raising tariff revenues to support domestic tax cuts. The situation requires careful portfolio positioning due to anticipated trade tensions and market volatility.
Frédérique Carrier
Managing Director, Head of Investment Strategy
RBC Europe Limited