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The EU approach favours negotiations and calibrated retaliation to avoid a full trade war that could harm its own economy
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During that fateful meeting between Ukrainian President Zelensky and United States (US) President Donald Trump in the Oval Office in February 2025, Trump told Zelensky (and indirectly Europe) that he had no cards. While Ukraine and the European Union (EU) are indeed heavily reliant on the US for its security, the EU has no dearth of cards when it comes to matters of trade. With 450 million consumers and an economy valued at 17 trillion euros and accounting for 22 percent of global GDP, the EU is the world’s largest single market.
On 9th April, the EU approved its first set of retaliatory tariffs on the US, levied in response to the 25 percent US tariffs imposed earlier this year on European steel and aluminum imports worth 26 billion euros. With the exception of the perennial outlier Hungary, the European Commission’s proposal to impose retaliatory tariffs on around 21 billion euros worth of American products was unanimously approved by 26 EU member states. The target sectors included soybeans, motorcycles, textiles, wood, poultry, orange juice, almonds and metals with the list tilting towards products exported from Republican strongholds. The countermeasures excluded bourbon whisky after successful lobbying from alcohol-exporting member states France, Italy and Ireland who fear Trump’s previous threats of a 200 percent tariff on European spirits coming to fruition.
The EU approved its first set of retaliatory tariffs on the US, levied in response to the 25 percent US tariffs imposed earlier this year on European steel and aluminum imports worth 26 billion euros.
The EU’s first-phase response did not include the sweeping tariffs of 20 percent that Trump announced on his so-called “Liberation Day” on April 2, which have already been “paused” for and reduced to 10 percent for the time being, or the 25 percent tariffs on all foreign automobiles. However, the White House’s U-turn has prompted the EU to also pause its agreed-upon retaliatory tariffs for 90 days to allow space for negotiations.
In 2023, the total volume of transatlantic trade in goods and services was valued 1.6 trillion euros. As the US’s largest trading partner in goods, services and investment, the EU has explicitly stated its preference to negotiate and reach a balanced outcome. The EU has also touted the “zero-for-zero” approach of mutually scrapping all tariffs on cars and industrial goods.
Yet if trade talks fail, the EU has vowed to implement its retaliatory tariffs and evaluate other countermeasures in its toolkit. Estimates project that if the US follows up with its 20 percent tariff rate after the current pause, this could result in a 0.3 percent reduction of the EU’s GDP forecast over the next two years and affect US$2 trillion worth of transatlantic trade. Moreover, Trump’s tariffs on Europe’s automobile and metal sectors remain in place along with the watered-down 10 percent rate on all countries.
The EU has a range of policy options at its disposal to respond to this burgeoning trade war. These include appeasing Trump by increasing purchases of American defence equipment and liquified natural gas (LNG). Yet the EU’s goal to boost its own arms industry contradicts this option and the Union already buys 40 percent of its LNG from the US.
Stating that the EU was created “to screw the US”, Trump’s grievances partially revolve around the EU’s trade surplus of 157 billion euros in goods. Yet in the area of services, the US holds a trade surplus of 109 billion euros with the EU, resulting in an overall transatlantic trade imbalance of only 3 percent. The US trade surplus in services means that the EU could use the size of its single market to target the US on its Achilles heel of tech giants and digital and financial services. However, the EU may be reluctant to follow this approach given the desire to dial down tensions rather than trigger further backlash.
As a last resort, the EU may consider invoking its Anti-Coercion Instrument (ACI) launched in 2023 through which it could impose wide-ranging trade and investment restrictions on the US. Again, it is unlikely to use such a harsh measure against a key ally coupled with the risks of escalation and the need for widespread support amongst member states.
A key factor shaping the EU’s response will be unity among member states, which has so far held but remains fragile considering the economic interests of different industries and countries and their varying exposures to US trade. Furthermore, Trump’s preference for bilateral deals could exploit EU divisions and espouse difficulties in keeping member states on board with potential countermeasures.
The EU approach favours calibrated retaliation as a catalyst towards negotiation rather than a full-fledged trade war that would impact its own economy in equal measure. Ultimately, any response may well be a double-edged sword—retaliatory tariffs would impact American producers, but also hurt European consumers and drive inflation. Moreover, the EU’s reliance on American defence and security will impact EU leverage on trade.
As Stéphane Séjourné, EU Executive Vice-President for Prosperity and Industrial Strategy, stated, “The only certainty is that instability will remain for the next four years”. Therefore, irrespective of the future trajectory of transatlantic trade, the EU will prioritise diversifying and deepening trade ties with other partners such as India, Japan, South Korea, and Canada to reduce dependency on the American market. Simultaneously, it aims to boost the integration of its own single market where internal trade barriers remain high.
Shairee Malhotra is the Deputy Director of the Strategic Studies Programme at the Observer Research Foundation
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Shairee Malhotra is Deputy Director - Strategic Studies Programme at the Observer Research Foundation. Her areas of work include Indian foreign policy with a focus on ...
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