Tariffs in the Crosshairs: Strategic Options for the EU Ahead of a Trump II Trade Offensive

INTRODUCTION

Transatlantic trade is the backbone of the world’s largest trade partnership. In 2023, trade in goods between the European Union and the United States reached €851 billion, with the EU recording a €157 billion surplus (European Commission 2025c). However, with the onset of Donald Trump’s second administration, this relationship faces new and significant political challenges. As recent as the 12th of June, President Trump announced that he will “send letters in about two weeks” setting country-specific tariff rates, warning even the most vested trade partners to either “take it or leave it” (Euronews 2025). These remarks echo the Section 232 steel and aluminium duties of Trump’s first term in 2018, which triggered prolonged “tit-for-tat” trade measures, a retaliatory dynamic that resulted in heightened tensions between two of the world’s largest trade partners (Reuters 2023). Now, with the return of yet another Trump presidential term, the risk of a renewed tariff war has resurfaced, just as Europe’s economic recovery remains fragile, and supply chains continue to adapt to the significant disruptions caused by the COVID-19 pandemic – ongoing conflicts such as the Russo-Ukrainian war, and the green transition.

In an attempt to chart the prospective tariff agenda, this paper will look at how a second wave of U.S. tariffs could affect EU growth and competitiveness in this new and uncertain world, and it will seek to shed some light on one of the more predominant questions raised by the political business of the day: Which policy instruments should the EU prioritize to blunt the shock effectively? By outlining the likely scope of the tariffs and identifying the main transmission channels to European firms and workers, this paper will seek to evaluate the EU’s response toolbox, ending with actionable recommendations for decision makers of the Union.  

Transatlantic trade overview

The EU and the United States remain each other’s largest commercial partners, with bilateral goods trade reaching €851 billion in 2023, whereas €503 billion was in EU exports and €347 billion in imports (European Commission 2025c). This leaves the Union with a goods surplus of €157 billion. However, in terms of service flows, the surplus is attributed to the United States. Transatlantic trade, in terms of services, totaled €746 billion in 2023, leaving the EU with a €109€ billion deficit. This is mainly attributed to U.S. firms’ dominance of digitally delivered services and business support (European Commission 2025c). Beyond flows of trade and services, investment ties are even deeper. EU and U.S. companies hold roughly €4.7 trillion in mutual foreign investment stock, which anchors millions of jobs on both sides (AmCham EU 2025). Sectorally, the auto industry accounts for around 8% of EU exports to the U.S., while machinery, pharmaceuticals, and aerospace round out as the top earners. On the other hand, the U.S. holds the strongest position in terms of aircraft, medical devices, and digital services (Eurostat 2025a; Eurostat 2025b; AmCham 2025).

Additionally, following Europe’s pivot away from Russian energy imports, the U.S. has capitalized heavily on its LNG (Liquefied Natural Gas) exports to the European continent, supplying as much as 45.3% of the EU’s LNG imports (Institute for Energy Economics and Financial Analysis 2025). Donald Trump’s impending tariff clash, which includes duties focused on transport equipment, would directly impact the EU’s surplus, and the broad accompanying surcharge would also erode both services competitiveness as well as long-term investment confidence, damaging both sides.

ANALYSIS

Escalation scenarios

Within weeks of assuming the U.S. presidential office, Donald Trump invoked section 232 of the Trade Expansion Act of 1962, imposing a 25% duty on all passenger-car imports, with an additional 10% levy on components, citing “national-security risks” (White House 2025). During a press conference on June 12th, President Trump announced an upcoming “take it or leave it” partner-specific tariff change, with a 90-day countdown to implementation (Euronews 2025; USTR 2025). If no agreement is reached, Trump warned that the current suspension of broader surcharges will expire on the 9th of July, triggering automatic increases on a wide range of imported goods. Many analysts expect an initial package that focuses on transportation and vehicles, particularly automobiles, as this is where the White House sees the largest deficit (Ülgen 2025).

From the automobile-tariff package already on the table, three broad outcomes are currently under discussion among analysts, whereas each carries its own different economic and political costs.

 1) Limited measures:

The Trump administration could stop with the current auto-related plan: a 25% duty on finished vehicles and 10% on vehicle components. As noted previously, cars account for about 8% of EU goods exports to the U.S. (which amounted to roughly €40 billion in 2024). This move would reduce but not overturn the EU’s goods surplus. Carnegie Europe analysis judges this to be the most likely course, given that it grants Trump’s administration a clear domestic political win, without too much impact on U.S. consumer prices (Ülgen 2025).

 2)Uniform 15% tariff on all EU goods:

If the EU refuses to make concessions or replies with its own duties, the U.S. could invoke the reciprocal-rate rule, as outlined by the Office of the United States Trade Representative (USTR) 2025 national trade estimate report on foreign trade barriers (USTR 2025).  This could entail an application for a uniform 15% tariff implementation on all EU goods after the 90-day deadline on the 9th of July (USTR 2025). The European Commission’s model work suggests that such a development would cut EU-wide gross domestic product (GDP) by about 0.4% in (European Commission 2025a).

3) Broad Escalation

A full breakdown in negotiations, especially if supplemented with mutual retaliation, could push auto tariffs to 50%, and extend a 25% charge to every product line. Simulations conducted by the Kiel Institute highlight that such a scenario would result in a “limited, around 1/10th of a percent” GDP loss for the EU, but at the same time warn of long-term strategic costs, given that this would likely prompt supply chains to relocate,  intensify subsidy competition, and eliminate the EU’s €157 billion goods surplus (Hinz et al. 2025).

Impact assessment

Tariffs first act as a tax at the border. According to the European Commission, a uniform 15% duty would raise the price of EU goods in the U.S. roughly similarly (European Commission 2025a). Simulations conducted by the Commission’s QUEST model show that this alone would reduce EU GDP by 0.2%, with a more substantial 0.4% reduction following a full “tit-for-tat escalation” outlined in scenario 3. EU member states most reliant on transatlantic sales, such as Czechia, Slovakia, and Germany, would get the brunt of the impact through lower factory orders.

When the duty increase strikes intermediate goods, such as car components and EV batteries, European companies would experience a heavier shock, as both U.S. sales and U.S.-based assembly plants are impacted (Bruegel and Rhodium Group 2025; Rabobank 2025). Worst-case scenario estimates produced by Rabobank highlight that a drop of €26 billion in exports could be expected if tariff rates of 50% are implemented. This would apply extra costs up to $4000 per vehicle (Rabobank 2025). The Kiel Institute for the World Economy also underscores that higher component costs could affect competitiveness across machinery and chemicals, further impacting EU industrial output (Hinz et al. 2025).

Implementing tariffs would also encourage additional policy actions, such as subsidy races for batteries and critical minerals, which are critical components and resources already strained and subject to volatility by preexisting geopolitical conditions and global tensions. The U.S. could also impose additional certification or documentation requirements on products that carry EU safety marks, as a tariff conflict would likely impact these areas of high strategic value. The EU, in turn, can rely on its Anti-Coercion Instrument (Reg. 2023/2675), which permits response options ranging from matching tariffs, to e.g., limiting U.S. firms’ access to public-sector purchasing options as a means of applying economic pressure (Norton Rose Fulbright 2024). Although this instrument has not yet been invoked, its existence serves as a means of deterrence.

EU Response toolbox

Under World Trade Organization (WTO) rules, the EU can match any U.S. tariff in value once a dispute panel confirms a violation (WTO 2024; European Commission 2025c). During the earlier-mentioned 2018 steel dispute, the EU published a ready-made retaliatory counter list within 48 hours, then targeting U.S.-made bourbon, bikes, and other commodities (Reuters 2018). Trade officials have now confirmed to have made an updated list covering both the auto industry and machinery (Council of the European Union 2025). In addition to this, as previously noted, the Anti-Coercion Instrument Regulation 2023/2675 lets the EU respond to economic pressure with varying measures, from mirroring tariffs to limiting U.S. companies access to public-sector purchasing.

To mitigate for lost U.S. sales, the EU is accelerating its already expansive diversification process to enable entry into other alternative markets. For instance, negotiations with the South American trade bloc MERCOSUR (Mercado Común del Sur) are closing in on finalization (AP News 2025). Exploratory talks with India, Indonesia, and other significant trade actors have also been stepped up lately, as underscored by the Union’s Commissioner for Trade and Economic Security (Šefčovič 2025).

The €5 billion Brexit Adjustment Reserve, established back in 2021 to mitigate losses stemming from the United Kingdom’s exit from the EU, showcases how grant systems can help affected communities cope with sudden economic shocks (European Commission 2021a). Similarly, a fund for affected areas, such as auto and battery supply chains, could cushion initial impacts and aid European producers in adjusting to the most immediate concerns, such as employment.

Recommendation

A renewed tariff clash with Donald Trump and his administration would expose the EU to primarily three shocks: Higher prices at the U.S. border, rising supply-chain costs, and a race to subsidize vulnerable and strategic sectors. Model and simulation estimates indicate that even a uniform 15% duty could remove 0.2% off of EU GDP in the first year, and up to 0.4% following a worst-case tit-for tat retaliation dynamic (European Commission 2025a). Although the auto industry-only package as of now looks most probable (Ülgen 2025), it is vital that the Union plan for wider escalation given Trump’s history of abrupt and unpredictable policy shifts.

 Balanced retaliatory measures are critical for strengthening EU resilience and credibility. The EU should publish its updated autos and machinery counter-list the moment the U.S. issues a potential final proclamation and request WTO authorizations to implement proportionate and equivalent counter-tariffs, thereby signaling firm, just, and legitimate rules-based resolve. At the same time, the European Council should trigger, but not deploy its Anti-Coercion Instrument, to underscore that the Union will stand firm and united in its response if the U.S. decides to escalate further. Additionally, the EU must accelerate its diversification efforts, conclude its MERCOSUR agreement, and deepen its commitment to actionable and credible talks with India, Indonesia, and the Gulf states, particularly to expand Europe’s long-term leverage and mitigate potential losses in demand. Finally, the EU should soften the prospect of a blow to the auto sector with a grant-based fund initiative modelled on the Brexit Adjustment Reserve, helping European firms save jobs and also finance critical re-tooling.  

In the long term, the successful utilization of these measures may prove detrimental to defending European growth and unity, particularly in a time when the successful defense of open, rule-based trade is vital to maintaining global stability and the credibility of market-based democracy.

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