Economic Impacts of US Tariffs on the EU

The economic landscape between the United States and the European Union has faced significant shifts due to the imposition of US tariffs. This article provides a comprehensive analysis of the economic impacts of US tariffs on the EU, examining the direct and indirect consequences for European economies, industries, and employment.

Even before taking office on November 5, 2024, Donald Trump championed tariffs as a means to 'Make America Great Again'. Despite initial skepticism, he swiftly implemented various tariff and trade threats, including a 20% tariff on China by March 2025, and 25% across-the-board tariffs on Mexico and Canada (with a carve-out for USMCA-compliant goods).

Notably, a 25% tariff was imposed on steel and aluminum exports from all countries, followed by tariffs on beer and beer cans. On March 27, 2025, a 25% tariff on all car and car part imports to the US was announced. Trump's rhetoric escalated, leading to 'reciprocal tariffs' on April 2, 2025, targeting countries accused of taking advantage of the US, often based on trade surpluses.

While these reciprocal tariffs were temporarily paused for most countries, a blanket 10% tariff remained in place for all countries, including the EU. China faced significantly higher tariffs, reaching up to 145% on various items, later adjusted. These policies have undeniably weakened world trade rules, created uncertainty, and posed a risk of international economic conflict, with the EU facing harsh effects from both general and sectoral tariffs, as well as potential redirection of Chinese exports.

Unpacking the US Tariffs on the EU: A Detailed Examination

This working paper specifically aimed to assess the risks to the European economy and jobs if the announced US tariffs on the EU were to persist long-term. It delved into the main characteristics of EU-US trade, emphasizing its importance for quality jobs within the EU.

The analysis focused on the direct impact of higher US tariffs on European output and employment. It deliberately excluded the complexities of a tit-for-tat trade war or secondary effects from redirected exports, particularly from China, due to their inherent unpredictability.

The Critical Role of the US Market for the EU Economy

The US is, by a considerable margin, the most important single export market for the EU. In 2024, it accounted for one-fifth of all EU goods exports, totaling €531.6 billion.

• Exports vs. Imports: The US absorbed 20.6% of EU goods exports, while only being the source of 13.7% of EU goods imports, placing it behind China in imports.
• Trade Surplus: This discrepancy results in a large and persistently widening EU trade surplus in goods with the US. In 2024, this surplus reached €198.2 billion, up from €158 billion in 2023, representing over 1% of EU GDP.

President Trump's interpretation of US goods trade deficits as a 'subsidy' to trade partners, although economically unsound, made the EU's large surplus a target for his administration. The 'reciprocal' tariffs were arbitrarily calculated based on this goods trade surplus.

Beyond Goods: Services and Investment

While tariffs primarily target goods, transatlantic trade in services is also substantial and presents a mirror image of goods trade.

• Services Trade: In 2023, total bilateral trade in services was €746 billion. The EU exported €319 billion of services to the US but imported €427 billion, resulting in an EU services trade deficit of €108 billion.
• Overall Balance: This services deficit significantly reduced the EU's total trade surplus with the US to approximately €50 billion in 2023 when goods and services were combined.
• Foreign Direct Investment (FDI): Both regions have substantial FDI stocks, broadly balanced at around €2.5 trillion. This allows European companies to shift production to the US as an alternative to exporting, potentially increasing US investment but reducing domestic EU production and employment.

Sectoral Vulnerabilities: Key Industries at Risk

The composition of EU goods exports to the US reveals significant concentration in specific manufacturing sectors, making them highly susceptible to tariffs.

• Manufacturing Dominance: In 2024, 91.5% of EU exports to the US were manufactured goods.
• Concentrated Exports: Within manufacturing, machinery and vehicles constituted 38.8% of exports, followed by chemicals (32.1%) and other manufactured goods (20.7%).
• Import Similarities: More than 55% of imports from the US to the EU were also machinery and vehicles, and chemicals, with energy-related imports making up nearly a quarter.

This pattern, while typical for trade between advanced economies, highlights the replaceability of many manufactured goods. This suggests that trade disruption could have a significant impact on output and employment.

Industries Directly Affected by the 25% Tariff

• Automotive Industry: A major employer in the EU27 with 3.1 million workers in 2024 (10% of manufacturing employment). Car exports make up 31% of total EU goods exports, with the US being the number one destination (23.5% of total EU car exports). In 2024, EU car exports to the US were €38.9 billion, yielding a €30 billion surplus for the EU. Germany is particularly exposed, with €25.1 billion in motor vehicle exports to the US.
• Steel Industry: Employed 303,000 direct jobs in the EU in 2023. Exports to the US accounted for 2.23 million tonnes, or 13.7% of total EU steel exports.
• Aluminum Industry: Supported 230,000 direct jobs in the EU27 in 2023. Exports to the US were worth $2.68 billion, also comprising 13.7% of total EU aluminum exports.

These sectors are not only significant employers but also face additional challenges, such as the automotive industry's electromobility transition, global overcapacities in steel, and high energy prices impacting aluminum. Tariffs exacerbate these pre-existing stresses.

Member State Exposure to US Trade

Vulnerability to US tariffs varies significantly among EU Member States. Ireland is the most exposed, with 53.7% of its exports destined for the US. Other highly exposed countries (over 20% of exports to US) include Austria (25.7%), Finland (23.0%), Portugal (23.2%), Germany (22.7%), and Italy (21.2%).

In absolute terms, Germany leads with €161.2 billion in US goods exports in 2024. Germany, Ireland, and Italy combined account for over half (56%) of total EU27 goods exports to the US, nearly €300 billion, and have a combined goods trade surplus close to the total EU27 surplus with the US. This highlights a critical level of exposure and vulnerability for these nations.

The Job Market Fallout: What Tariffs Mean for EU Employment

Estimating the impact on EU jobs requires looking at employment levels in the most exposed sectors.

Employment in Highly Exposed Sectors

Mapping trade statistics to employment figures provides an order of magnitude for the most relevant sectors:

• Machinery and Vehicles: Over 3 million jobs concentrated here.
• Electrical Equipment & Computer, Electronic, Optical Products: Over 2.6 million jobs, with each exceeding 1.3 million.
• Chemicals & Pharmaceuticals: A further 2.3 million workers (1.3 million in chemicals, 966,900 in pharmaceuticals).

Germany alone has approximately 4.5 million workers in these sectors, with 1.1 million in motor vehicles and trailers, making it highly exposed. Italy follows with nearly 1.5 million workers in exposed sectors. Central and Eastern European countries like Czechia, Hungary, Austria, and Slovakia also have significant employment shares in these vulnerable sectors.

Estimating Jobs Dependent on US Exports

Based on a 2019 study, 38.13 million EU jobs were supported by total EU exports of goods and services worldwide. Approximately 58% of these, over 22 million jobs, were linked to manufacturing exports.

• US-Specific Jobs: By extrapolating with updated 2023 Eurostat data (US share of total EU exports at 20.6%), it's estimated that roughly 7.8 million EU jobs are supported by EU goods and services exports to the US.
• Goods Export Jobs: Since 61% of these exports were goods (where tariffs apply), approximately 4.8 million EU jobs are supported by goods exports to the US, mostly within the manufacturing sector.

While this represents a relatively small share (2.4%) of total EU employment (just under 200 million jobs), it's a significant proportion of the 31 million manufacturing jobs in the EU. This comes against a backdrop where the EU27 already lost 2.9 million manufacturing jobs in the past 15 years.

The Impact of a 20% General Tariff

If a 20% general tariff is imposed by the US on EU goods exports, the consequences for these 4.8 million jobs could be substantial. Expert estimates suggest a fall in export volumes of 0.5-0.8% for every 1% hike in tariffs. A study on German exports estimated a 14.9% contraction in German exports to the US from a 20% tariff.

• Potential Job Losses: Based on this elasticity, a 20% US tariff could put approximately 720,000 EU jobs at risk, primarily in manufacturing. These jobs would effectively be lost unless alternative foreign or domestic demand is quickly secured.
• Sectoral Tariffs Impact: The 25% sectoral tariffs on cars, steel, and aluminum further amplify this risk. For instance, a 25% US car tariff could lead to a 5.1% contraction in Germany's automotive gross value added, translating to 55,000 automotive job losses in Germany alone. The steel and aluminum industries face similar contractions of 5-10% in US exports.
• Redirected Exports: Additionally, high tariffs on Chinese exports to the US could lead to a flood of Chinese goods into European markets, increasing pressure on EU producers without countermeasures.

These job losses would be regionally concentrated, hitting areas with large chemical, pharmaceutical, vehicle, and machinery sectors. Export-related jobs also tend to be 12% better paid, so their loss could lower overall job quality.

EU's Toolkit: Responding to Trade Disruptions

The EU needs a robust two-pronged approach: an effective trade policy response and domestic measures to support industries and workers.

Trade Policy and International Engagement

• Retaliatory Tariffs: The European Commission can use instruments like retaliatory tariffs, calibrated to minimize self-harm while maximizing pressure on the US. Shifting focus to services, where the US has a surplus with the EU, could be strategic.
• Digital Monopolies: Restrictive measures on digital monopolies, justifiable for other reasons, could also impact major financial backers of the US administration.
• Diversification: Intensifying engagement with other trading partners (who buy 80% of EU goods exports) and easing trade barriers with them, while respecting standards, would be beneficial.
• Preventing Diversion: Agreements or countermeasures are needed to prevent a sudden diversion of goods from countries like China (heavily tariffed by the US) into the EU market.

Supporting EU Production and Jobs

Reorienting trade and reorganizing value chains will take years. The EU must implement short- and long-term measures:

• SURE Mechanism: Reintroducing a version of the European Instrument for Temporary Support to mitigate Unemployment Risks in an Emergency (SURE) could offer unemployment 're-insurance', helping avoid dismissals and financing benefits and labor market policies during such crises.
• Just Transition for Trade: Applying the concept of a just transition to trade disruptions, particularly for affected sectors like automotive, steel, and aluminum, is crucial. Expanding the European Globalisation Adjustment Fund for Displaced Workers (EGF) in scope and resources would be vital.
• Social Dialogue: Deepening and broadening sectoral and intersectoral social dialogues (e.g., Tripartite Social Dialogue, Macroeconomic Dialogue) with full trade union participation is fundamental. Support for companies should be tied to social conditionalities.
• Fiscal Policy: The European Commission should be ready to revise European fiscal rules and establish a permanent fiscal capacity (replacing the temporary Recovery and Resilience Facility) to boost investment, as identified in the Draghi Report, and strengthen EU's strategic autonomy.
• Monetary Policy: The European Central Bank (ECB) should signal willingness to cut interest rates faster to sustain aggregate demand and ease financial pressures. Given deflationary impacts, the ECB needs to be proactive.

This crisis presents an opportunity for Europe to move beyond current limitations, foster domestic demand, and achieve a balanced current account, shifting away from a 'small open economy' mercantilist mindset.

FAQ: Understanding the Economic Impacts of US Tariffs on the EU

What are the main economic impacts of US tariffs on the EU?

The main economic impacts include a direct reduction in EU goods exports to the US, particularly in manufacturing sectors like automotive, chemicals, and machinery. This leads to job losses, with an estimated 720,000 EU jobs at risk from a 20% general tariff. Additionally, there's a risk of goods redirected from other tariff-hit countries (like China) flooding the EU market, increasing pressure on European producers.

Which EU sectors are most vulnerable to US tariffs?

The most vulnerable sectors are manufacturing industries with high export shares to the US. These include the automotive industry, chemicals and pharmaceuticals, and machinery and vehicles. The steel and aluminum industries are also significantly affected by specific 25% tariffs.

How do US tariffs affect EU employment?

US tariffs lead to reduced demand for EU exports, which in turn can cause job losses in affected sectors. For example, a 20% general tariff could put 720,000 EU manufacturing jobs at risk. These job losses tend to be concentrated regionally and in higher-paying export-related roles, potentially lowering overall job quality.

What measures can the EU take to mitigate the impact of US tariffs?

The EU can implement retaliatory trade policies, potentially focusing on US services. Domestically, it can reintroduce unemployment support schemes like SURE, expand the European Globalisation Adjustment Fund, strengthen social dialogue, revise fiscal rules, and establish a permanent fiscal capacity for investment. The ECB can also proactively cut interest rates to support demand.

Is the EU-US trade balance focused solely on goods?

No, while discussions often focus on goods, transatlantic trade in services is also substantial. The EU has a significant trade surplus in goods with the US, but a substantial deficit in services trade. When both are combined, the overall EU trade surplus with the US is significantly reduced.