US tariffs to thwack European economy: report

In a recent report, the European Central Bank (ECB) highlighted trade tariffs as one of the European economy's major challenges. This assessment came just days after the US administration decided to slap a 25 percent tariff on steel and aluminum imports, along with additional levies on cars, semiconductors and pharmaceuticals.

Although the full scale of new US tariffs targeting European imports remains unclear, concerns are mounting that they will significantly impact the bloc's economy.

An existential threat

The steel industry in the EU, already struggling with high energy costs and weaker demand, has been thrown into disarray following Washington's tariff announcement.

To add insult to injury, the new steel tariff, according to Henrik Adam, president of the European Steel Association, will "inevitably push EU steel capacity into additional idling and, ultimately, closure."

In a statement released by the association on February 11, Adam said that the EU could lose up to 3.7 million tons of steel exports to the United States as a result of the new tariff policy and that additional steel products from third countries will find their way into the European market, worsening the already precarious situation for the European steel industry.

There is little the EU could do to deflect the implications as the United States is the second-biggest export market for EU steel producers, representing 16 percent of the total EU steel exports in 2024, the statement said.

According to Adam, a total of 9 million tons of capacity and over 18,000 jobs were lost in the European steel industry in 2024.

On February 18, US President Donald Trump announced plans to impose a 25 percent tariff on automobile imports, a policy that poses significant challenges to the European automotive industry.

"Germany's Volkswagen, Sweden's Volvo and the US-European conglomerate Stellantis are most exposed to potential new tariffs because of their greater reliance on US sales and higher proportion of imports to the United States," senior analyst Ruosha Li at the credit rating agency Moody's was quoted by The Guardian, a British daily, as saying.

Should a 25 percent tariff be levied on car imports in the United States, German car exports to the United States can drop by as much as 7 percent and those of Italy to the United States can decline by 6.1 percent, warned a report published by an economic advisery firm Oxford Economics.

"This isn't a headwind for German carmaking. It's a full-on storm," said Sander Tordoir, chief economist at the think-tank Centre for European Reform.

Financial market turmoil

The impact of the US tariffs was immediately felt in EU stock markets. On February 3, the STOXX Europe 600, a broad measure of the European equity market, recorded its largest single-day decline of the year. Some auto and auto parts stocks even slumped by over 4.3 percent during the intra-day trading.

The announcement of a sweeping 25 percent tariff on steel and aluminum imports in the United States on February 10 brought stocks in the steel industry down, with ArcelorMittal and Voestalpine declining by around 2 percent.

The uncertainty wasn't limited to stocks. In the foreign exchange market, the introduction of new tariff policies has bolstered the US dollar, denting the euro's value and stability.

Goldman Sachs recently predicted that the euro-to-dollar exchange rate will drop below parity within the next year, possibly reaching 0.97 to 1.

Analysts have observed that although a weakened euro might temporarily boost exports, the high US tariffs could reduce any trade benefits derived from the euro's depreciation.

Moreover, Europe would face higher costs for importing energy and other dollar-denominated raw materials and semi-finished products. This could exacerbate inflationary pressures in the eurozone, while also complicating the ECB's efforts to stimulate economic growth, particularly after multiple interest rate cuts aimed at fostering recovery.

If the EU decides to retaliate and impose tariffs on US imports, prices in the EU will also be pushed higher, according to a report by the European Parliament.

Lorenzo Codogno, former chief economist at Italy's Ministry of Economy and Finance, warned that the tariffs could disrupt inflation expectations and exchange rates, forcing the ECB to intervene.

A bleak outlook

"Greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy," warned the ECB recently in its Economic Bulletin.

Facing escalating tariff pressures, several European companies are considering increasing their investments in the United States, intensifying the trend of European industries relocating abroad.

French tire manufacturer Michelin plans to accelerate investments in its US operations to mitigate potential tariff impacts, while luxury goods conglomerate LVMH is "seriously considering" expanding its production capacities, according to media reports.

In the automotive sector, analysts suggest that German automakers Porsche and Audi may need to establish manufacturing facilities in the United States to mitigate the impact of tariffs.

Stefan Bratzel, head of the Center of Automotive Management in Germany, noted that while building US production sites would be costly and challenging, it could be the only long-term solution if automobile import taxes remain high.

Speaking at the Eurogroup press conference on Monday, Valdis Dombrovskis, the EU's economy commissioner, warned that the US tariffs would weigh on the economic growth of the bloc.

According to Dombrovskis, the EU stands ready to "respond in a firm and proportionate way" to the tariff measures, which it deeply regrets.

The uncertainties surrounding the trade policies between the United States and the EU are harming the global economy including the United States, Dombrovskis said.

"We expect the EU economy to grow at a slightly slower pace compared to what we had projected in the autumn forecast," he said.

Economist Ruben Dewitte of ING Group warned that the tariffs could push the eurozone into recession. "Protectionism is a lose-lose game," Dewitte said. "It stifles growth, discourages investment, and erodes trust. And with Trump's second term, things could get even worse."