Eurozone – High stakes amid political fracture risks

Trade tariffs: Marginal direct impact

The US election’s potential impact on the Eurozone is rather binary – a Kamala Harris victory is unlikely to have a material effect but a Donald Trump win would. Trump wants to narrow the US trade deficit and the Eurozone is a key contributor to this. The bloc exported €450bn of goods in 2023 (or 3.1% of GDP) (Exhibit 4), yielding a surplus to the US of €133bn.

If he were to secure a second term, Trump has proposed a blanket 10% tariff on the rest of the world, including the Eurozone. The weighted average of US tariffs on EU exports is around 3%, according to World Trade Organization data, implying a further 6.8% rise in export prices. Assuming an historical elasticity of around -1, we estimate it would reduce total Eurozone goods exports by €30bn (0.2% of GDP) – a rather limited direct impact. We note, that the bulk of eurozone exports gross value added to the US mainly consists of intermediate goods which may suggest some downside to historical elasticity. Such an impact should be further moderated by a depreciation of the euro against the dollar in response to domestic tariffs and other policy adjustments limiting the Federal Reserve’s space for cuts. This would likely lower the price of Eurozone exports, also potentially benefitting the bloc from increased competitiveness in non-US countries if they retaliate with increased tariffs on the US, but not on the Eurozone. Since the start of 2023, net trade has already added 0.2 percentage points (ppt) per quarter to Eurozone growth (0.0ppt in 2014-2019), with share of US exports up 8% – tariffs present a direct risk.

We see a bigger indirect risk if a second-term Trump trade policy starts a trade war between the three main economic blocks. Trump has been even more aggressive towards China, threatening 60% tariffs. At the risk of oversimplifying, Chinese exporters would likely try to find a substitute market with similar consumers to the US; Europe would be the natural target. A number of European industries, already in a tumultuous state, would face greater competition from Chinese producers, raising expectations of EU intervention with its own tariffs. Yet the current negotiation on Chinese electric vehicle tariffs has revealed challenges on this path. Reaching an EU majority is complex, as each country’s interests differ. Furthermore, political stability in the Eurozone has significantly eroded since Trump’s first term and key elections loom in Germany (2025), Italy (2026) and France (2027 at the latest).

For the Eurozone, global protectionist policies, together with associated economic uncertainty would likely affect domestic and foreign investment. The impact is difficult to estimate but would be crucial for both short and medium-term growth.