Strategic Diversification: Europe's Imperative in Transatlantic Trade

Introduction

The transatlantic relationship between the United States (US) and Europe is a significant partnership on the global stage, particularly in trade. In terms of purchasing power, it accounts for around 1/3 of international trade (Hahn, 2025). A stable relationship is essential not only to the US but also for Europe; US FDI employ 2.1% of workers and goods trade reached $1.5 trillion in 2023 (Coi, 2025). Current events, actions, and words coming from the USA are a cause for concern (Cingari, 2025). The sentiment from the Trump administration has been that Europe exists solely to take advantage of the US, treating it unfairly, hence the need to impose tariffs (Coi, 2025). The relationship is changing, and the time has come for Europe to reconfigure its approach. Reconfiguration does not mean decouple, no partner out there in the world that can replace America. However, what Europe can do is strategically diversify trade partners for key industries to insulate them from the harshest shocks, without directly confronting the US.

Crucial European industries, such as automotive and agriculture, have been among the main points of contention for the Trump administration (Chiacchio, 2018). Europe's automotive industry is already struggling, and the addition of US tariff barriers puts the industry under serious pressure (Coi, 2025; Ragonnaud, 2024). The agricultural sector is the core of the EU and is vulnerable to market instability (Mchugh & Wiseman, 2025). Europe must be proactive, but faces a dilemma of trying to appease or protect itself from the unpredictable US.

This brief focuses on trade beyond Europe’s borders, specifically recommending the strategic diversification of trade partners in key sectors of the European economy. This brief aims to address the following research question: How can the European Union respond to major external trade shocks to mitigate sectoral vulnerabilities and enhance economic resilience through strategic diversification? First, the brief summarises the background of the current Trump effect on US-Europe trade relations and why it matters. Then it will analyse two key sectors of Europe’s economy and demonstrate how to achieve strategic diversification.

The Unpredictable Transatlantic Environment

A second Trump presidency has again destabilised trade with Europe. Both in his first and now second terms, the administration has decried EU policies and regulations as unfair, going so far as to say that the sole reason the EU exists is to harm the United States (Coi, 2025). In both administrations, there has been and is an apathy towards trade and a sentiment of unfair treatment; the differing factor between Trump 1.0 and Trump 2.0 is that the second version is far less constrained, more aggressive, and unilateral in its actions (Keith, 2025). Furthermore, the Trump 2.0 administration has implemented a sweeping tariff regime on all countries with which the US trades, imposing a blanket 10% tariff on all partners (Drumm et al., 2025).

Under Biden, the environment for US-EU trade was far calmer, as Biden returned to multilateralism and tried to mend bridges while still engaging in protectionist measures (Brattberg, 2024). Trump 2.0 is transactional, prioritising its own benefit; it is more focused on securing the best for the USA (Chen, 2025). Continuing, it is also a far more unpredictable entity to gauge than Biden or even Trump 1.0, for example, tariffs have gone on and off several times in the short time Trump has been in office. This is crucial for understanding the current state of trade relations and why this policy brief recommends strategic diversification to mitigate vulnerabilities associated with a highly unpredictable partner, the USA. Europe needs a measured and accelerated response. Two central industries for Europe have long been a point of contention for Trump, the automotive industry and the agricultural sector, and have been subject to his ire (Drumm et al., 2025). The automotive sector employs 6.1% of all employees in the EU, and the agricultural industry 3.8% in 2023 (Hahn, 2025). When they are directly threatened with losses, tariffs, and, as is the case for the automotive industry, already under immense pressure, there is an urgency to act (Hahn, 2025). However, it is illogical to suggest that Europe needs to decouple from the USA fully; there is a 1.68 trillion USD trade relationship which cannot be replaced, or to suggest hitting back at the US since that serves nothing but to accelerate a trade war (“EU-US Trade: Facts and Figures”, 2024).

Furthermore, Europe is unlikely to desire such a conflict with the USA, given mutual dependency, vulnerable sectors, and issues of cohesion that influence decision-making. Hence, an alternative approach to securing European interests in this climate is necessary: diversification of strategic trade partners. The following sections explore how such a diversification strategy could be implemented in vital sectors.

European Measures: Sectoral Vulnerabilities

The Trump 2.0 administration has generally engaged in sweeping tariffs with several industries being targeted, yet Europe’s automotive and agricultural industries have received the harsher tariffs in the regime (Lechevallier, 2024)

Specifically, the auto industry has been targeted with 25% and the agricultural industry with 10%-25%. The auto industry is already vulnerable due to competitiveness issues, and further stress could endanger 6.1% of the EU’s employees, whereas 3.8% are at risk in the agricultural industry (Hahn, 2025). The 25% tariffs applied on the auto industry would result in a 13.7% decline in auto exports for Germany and Italy combined, harming two of Europe’s biggest players (Hahn, 2025). The numbers demonstrate clear vulnerabilities to one of Europe’s key industries and employers, and measures should be taken to reduce the potential harm.

The agricultural industry of Europe faces similar exposure, given that the US is its second-largest destination for products. In 2023, the US accounted for 14.2% of processed products, and the total value of that trade reached $246.24 billion (“Processed agricultural products in the EU”, n.d.). Furthermore, if current tariffs and future ones are imposed, the sector would face price increases, lower demand in the US market, and hurt major exporters like France (ibid.). In the EU, specifically, the sector is supported by subsidies which account for the largest part of the budget, more strain on the sector than would demand increases in subsidies or face a collapse (“The common agricultural policy explained”, n.d.). The sector has demonstrated its political volatility in the MERCOSUR negotiations, risk exposure is sure to exacerbate this, and as such any diversification to currently more stable partners is advisable. At a time when the Bloc is already facing a multitude of pressures on its unity and systems it is imperative that one not allow more problems to pile on to the already strained relations.

Strategic Diversification

This brief does not call for an end to US ties; this is not possible. The recommendation of this brief, and the others, is to reduce overexposure and secure the European economy. Specifically, this brief recommends a diversification of trade partners.

For the automotive sector, diversification needs to come with some rules, meaning finding markets that have limited saturation, provide an opportunity for mutual growth, and assist European car makers in securing supply chains necessary for the green transition. Argentina, part of MERCOSUR, provides the ideal partner. Europe already has a stable partnership with Argentina on trade as well as providing a source for essential lithium (Hay, 2023). It is also a market for a struggling European EV industry as the state has allowed the tariff free importation of 50,000 hybrid and EV vehicles, not only opening their market but also that of the MERCOSUR bloc (Khairani, 2024). Europe should accelerate the ratification of the EU-MERCOSUR agreement. It is the explicit recommendation of this brief that the EU reduce barriers to concluding trade agreements with partners to insulate and secure vital industries. These barriers, for example, the climate clauses, can be revisited once the relationship is stable.

In terms of the agricultural sector, further diversification is a necessary action to insulate the industry from shocks. The Gulf Cooperation Council, and especially the UAE, represent an ideal partner for agricultural exports, and a different source of critical energy supplies (Reuters, 2025). A partnership with the GCC could benefit both sides and deepen European ties and provide both partners with information exchange in critical sectors. The recommendation is based on initial talks between the two entities taking place, and Europe’s Global Gateway initiative could be mobilized in support. Europe should push harder for accelerated talks and attempt to secure such a mutually beneficial deal. Similarly to the automotive industry diversification it is in the interest of the EU to reduce value-based barriers, such as climate clauses, to conclude agreements at the pace necessary in these unpredictable transatlantic relations.

Europe possesses the tools already to engage in the diversification, such as the Global Gateway or free trade agreements. This diversification also should be accelerated given the unpredictable nature of the transatlantic relationship, meaning this brief advises a reformulation of the values-based approach from Europe. Specifically, Europe should be willing to forgo some environmental or rights-based concerns in the short term to secure agreements and use the developing positive partnerships later to revisit these values. This accelerate agreements, while not abandoning values altogether.

Conclusion

Trump 2.0 is unpredictable and a threat to key European industries. However, Europe cannot escalate or isolate itself from the US; they will remain our largest trade partner and an essential ally. What Europe can do is diversify its trade partners to reduce the damage while not abandoning or aggravating the US. Europe must remain open and allied to the US, but it cannot be dependent.

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