How Trump’s tariffs could spark a trade war and ‘Europe’s worst economic nightmare’

The prospect of a trade war ignited by the Trump administration is looming over European capitals. The European Union - which counts the United States as its largest export market and one of its closest strategic allies - could be among those hardest hit if President-elect Donald Trump follows through on his tariff plans.

Already, Europe’s major economies are lagging behind the United States in their post-pandemic recovery. Economists say that protectionist policies imposed by Trump after taking office in January could trigger further contraction on the continent, while straining alliances.

Here’s what to know.

Trump has threatened the biggest tariff hike in nearly a century

Trump imposed hefty tariffs on steel and aluminum last time he was in office. But this time, he says he would go much further. He has threatened to slap tariffs of 60 percent on all Chinese goods and 10 to 20 percent on imports from other countries. That would include the E.U.

Trump has expressed particular frustration with trade imbalances on cars and agriculture. The E.U. maintains a 10 percent tariff on cars (compared to the 2.5 percent U.S. rate) and agricultural tariffs of about 11 percent (more than double the U.S. rate).

“I’ll tell you what, the European Union sounds so nice, so lovely, right? All the nice European little countries that get together,” Trump said at a Pennsylvania rally last month. “They don’t take our cars. They don’t take our farm products. They sell millions and millions of cars in the United States. No, no, no, they are going to have to pay a big price.”

Those tariffs could seriously hurt European economies

How big a price is uncertain. There is talk of “Europe’s worst economic nightmare” and “full-blown recession.”

Some economic models estimate that, faced with an across-the-board 10 percent tariff, euro zone exports to the United States could fall by nearly a third. That would be a big deal, because Europe is so export-dependent, and its largest economies are already facing sluggish growth and rising debt. Goldman Sachs calculates that trade conflict with the United States could subtract 0.9 percent from the euro zone economy.

Some models suggest that Trump’s floated tariffs could hurt Europe as much as or more than China. While China is the top single-country supplier to the United States, the total value of imports from the E.U. has tended to be greater than those from China, according to the Office of the U.S. Trade Representative. New U.S. tariffs on China could also have an indirect impact on Europe. If China responds by diverting more goods to the continent, that would increase supply and put downward price pressure on competing goods produced in Europe.

Germany and its car industry would be particularly vulnerable

Germany - traditionally the economic engine of Europe, and a frequent target of Trump - would be especially exposed.

Among E.U. countries, Germany is by far the leading exporter to the United States, with exported goods valued at $171.8 billion in 2023, according to the German federal statistical office. A Trump tariff hike could lead to a damaging drop in those exports, with the biggest anticipated impact on the car and pharmaceutical industries.

Trump likes to take aim at German cars. But that sector is already struggling in the face of increased competition from China and weakened demand. Volkswagen has said it may have to close plants for the first time in its history.

Meanwhile, the German economy has stagnated. And the prospect of a trade war has exacerbated recession fears in Berlin. The president of the German Federal Bank, Joachim Nagel, said new Trump tariffs could cost Germany 1 percent in economic output. “If the new tariffs actually materialize, we could even slip into negative territory,” he told German news weekly Zeit.

The German Economic Institute warned that the combination of 10 percent U.S. tariffs and retaliatory E.U. tariffs could result in a loss of more than $134 billion in Germany’s GDP by the end of Trump’s allotted four years in office. Tariffs of 20 percent from both sides could cost the German economy $190 billion.

Europe could retaliate with tariffs that target red states

As they prepare for Trump’s return, E.U. officials have drafted lists of potential retaliatory tariffs.

“It’s a lose-lose situation because, yes, it means we’re fighting back, but it also hurts the economy on both sides,” said an E.U. diplomat, speaking on the condition of anonymity to share internal discussions.

The plans haven’t been made public. But clues can be found in the E.U.’s response to the steel and aluminum tariffs of Trump’s last presidency. Then, as now, the E.U. favored targeted tariffs designed for maximum political impact. The block went after industries based in the home states of Republican leaders. Among the goods singled out: Kentucky bourbon, Harley-Davidson motorcycles and Levi’s jeans.

Europe is strategizing to avert a trade war

The strong preference among European officials would be to collectively persuade Trump to forgo steep tariffs. European Commission President Ursula von der Leyen laid out the intended approach. “First of all: engage,” she said. “Secondly, discuss common interests … and then go into negotiations.”

E.U. officials assess that Trump may be using the threat of tariffs as leverage. His real goal, they say, may be to trigger new trade talks and extract concessions. They think he could be enticed by European offers to buy more liquefied natural gas or military equipment from U.S. companies. He might also welcome European pledges to take a harder line on Chinese trade by imposing their own new tariffs or otherwise restricting Chinese goods.

Trump’s tariffs threats could divide the E.U.

European leaders are emphasizing the need to remain united in the face of tariff threats, but that could prove difficult.

There are diverging views within the E.U. on whether a harder line on China would be a reasonable concession. Germany is especially reluctant to relinquish the Chinese market for German cars or to lose access to manufacturing facilities that German companies have set up there.

“There’ll be a risk of division among Europeans, depending on the sectoral interests and of different countries, some of which are very exposed to the Chinese market,” French President Emmanuel Macron warned, “while others who are more dependent on the American market will give in more quickly to the pressure that the American federal government may put on them.”

There is also concern that Trump could try to play favorites among leaders in Europe or that individual countries could seek tariff exceptions from a transaction-oriented administration. Trump allies have described Italian Prime Minister Giorgia Meloni, the rising star of Europe’s far right, as “a natural partner.” Could that be enough to shield Italian cheeses from tariff hikes?

“There is a risk that he will cozy up to some and shut others out - that this will play to divisions,” said a second E.U. diplomat. “But there’s also a chance to figure out something together.”