
The European Commission is bracing for a potential move by the United States to impose tariffs on European products. This development follows a series of tariff measures recently introduced by U.S. President Donald Trump, including a 25% tariff on Mexican and Canadian goods and a 10% tariff on Chinese imports. In response, the European Union (EU) has pledged to retaliate with similar measures, signalling a growing tension between two of the world’s largest economic powers.
The shockwaves from the U.S. tariffs have already disrupted global markets, leading to declines in the value of both the Mexican peso and the Canadian dollar. The uncertainty surrounding trade policy has also affected trading activities in European and Asian markets, with businesses and investors increasingly concerned about the potential for further instability.
President Trump has justified these tariff measures by pointing to what he claims is a substantial trade imbalance between the U.S. and the EU. According to the President, the U.S. runs a trade deficit of over $300 billion with the EU. Over the weekend, he announced that tariffs on European goods were “definitely going to happen,” adding to concerns about an escalating trade conflict.
Within the EU, reactions to the possibility of tariffs have been mixed. Some leaders are working to calm fears of a full-blown trade war. Donald Tusk, Poland’s Prime Minister and holder of the rotating Presidency of the Council of the European Union, sought to reassure the public by stating, “There is cause for concern, but not fear.”
However, others have taken a more assertive stance. At the World Economic Forum in Davos, Valdis Dombrovskis, the European Commissioner for the Economy, warned that the EU would respond in a proportionate manner to any measures that threaten its economic interests. He emphasised that the EU would not hesitate to defend itself, highlighting the seriousness of the potential impact on global trade.
Commissioner Dombrovskis referenced data from the International Monetary Fund (IMF), which estimates that a tariffs-based trade policy between the U.S. and the EU could result in a 7% reduction in global GDP. Such a scenario would have far-reaching consequences, disrupting supply chains and investment flows at a time when the global economy is already grappling with inflation and other pressures.
During the Davos forum, European Commission President Ursula von der Leyen underscored the challenges posed by intensifying global competition. She noted that the use of economic tools such as tariffs, sanctions, and export controls would likely become more frequent in this competitive environment. Von der Leyen called for coordinated efforts to prevent a “race to the bottom” in global trade, warning that unchecked protectionism could harm both developed and developing economies alike.
The U.S. administration’s decision on European tariffs is expected by April 1st, the deadline for a comprehensive trade review initiated by President Trump during his early days in office. This review may arrive ahead of schedule and is anticipated to include policy recommendations that could target the EU with additional tariffs.
Trade relations between the EU and the U.S. are particularly significant given the scale of their economic partnership. In 2023, the U.S. was the largest market for EU exports and the second largest source of EU imports. Over that year, EU exports to the U.S. increased from approximately €40 billion to more than €43 billion, while imports from the U.S. rose from €24.2 billion to €31.1 billion. These shifts narrowed the U.S. trade deficit with the EU by roughly €4 billion, indicating a more balanced trade dynamic.
To address the challenges posed by U.S. trade policies, the European Commission is expected to refine its approach to supporting domestic industries. Under the Competitiveness Compass framework, inspired by recommendations from former Italian Prime Minister Mario Draghi, the EU plans to streamline state aid procedures. This move aims to accelerate the development of key technologies, including artificial intelligence and renewable energy, allowing Europe to compete more effectively with both the U.S. and China in these critical sectors.
Member states will play a vital role in shaping the EU’s diplomatic strategy with the U.S. As high-stakes negotiations loom, leaders from across Europe will need to collaborate closely to present a unified front. Italian Prime Minister Giorgia Meloni, in particular, has positioned herself as a key intermediary. Meloni has established a strong relationship with President Trump, having been the only European leader invited to his inauguration. Her connections, which extend to influential figures in the U.S. administration, including Elon Musk, could prove advantageous for Europe’s efforts to maintain constructive dialogue with the U.S.
Meloni’s diplomatic influence may help foster a balanced and competitive relationship between the two powers, ensuring that Europe and the U.S. can continue their strategic partnership. This cooperation will be particularly crucial in areas such as trade, innovation, and the Atlantic Alliance, where both regions have shared security and economic interests.
As tensions escalate, the EU is determined to safeguard its economic interests while avoiding an all-out trade war. The coming months will test the EU’s ability to navigate these challenges, balancing defensive measures with opportunities for collaboration to protect and strengthen its role in the global economy.