The US is running a substantial net trade deficit with the European Union (EU). Europe has a surplus—but with more exports at risk, it also has the weaker position in a potential trade conflict.
Despite earlier (now paused) tariff countermeasures, and more recent rumors of potential trade restrictions, we think negotiation is the EU’s best tool. During the 90-day tariff pause period, the EU will use diplomacy to try to remove the new US tariffs altogether while resisting any new ones, such as potential levies on pharmaceuticals and semiconductors.
If the US tariffs remain in place or are increased, the EU has a further option: to impose tariffs on US services exports to the eurozone. While the US administration highlights the country’s traded goods deficit with the eurozone, the US has a surplus when it comes to services.
The EU could also go as far as to invoke the wide-ranging anti-coercion instrument, but this bold step would be unlikely, particularly versus a trading partner and ally as powerful as the US.
EU leaders have a further problem: high US trade tariffs on Chinese products. These will likely divert Chinese goods to third countries—notably euro-area nations—at low prices. A major redirection of trade flows to the eurozone would challenge both the current trade balance with China and Europe’s industries. The EU is already discussing the situation with China and is about to set up a special task force to track Chinese imports. However, a specific bargain with China might be unacceptable to the US and reignite tariff friction, potentially resulting in higher US tariff rates for the eurozone.
Alternatively, the EU could impose tariffs and/or enact specific anti-dumping measures to limit the flood of Chinese imports and manage their prices. Calibrating these measures would be a highly difficult balancing act: they would need to be tough enough to prevent price falls in the eurozone, but not to deter trade with China altogether.
The EU finds itself in a sorely testing position—not one but two of its biggest trading partners have powerful cards to play.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.
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