Europe braces for trade turmoil under Trump 2.0

German newspaper front pages with President-elect Donald Trump, in Cologne. AP

Donald Trump’s re-election has reignited fears of US protectionism across Europe and Asia, sparking concerns that a new wave of tariffs could compound global trade tensions – already heightened by the EU-China standoff.

Export-reliant economies such as Germany are bracing for a hard hit, with Mr Trump’s aggressive stance on trade threatening to worsen the existing economic turbulence in Europe’s largest economy. Industrial production has slumped by 16 per cent since 2017, and the IMF expects German GDP to grow by only 0.8 per cent next year.

The EU-China trade tensions have already shaken business confidence, with both sides imposing retaliatory tariffs over electric vehicles and brandy. Now, Mr Trump’s promise of tariffs as high as 60 per cent on Chinese imports, and up to 20 per cent on others, raises the stakes even further.

Shipping stocks and companies dependent on trade – such as Maersk and Hapag-Lloyd – have felt the effects, dropping on Wednesday. Companies are expected to “front-load” shipments to the US before tariffs take effect, causing strain in logistics and supply chains, and inevitably driving up costs.

Mr Trump’s trade policies put Europe in a difficult position, with the continent now managing dual threats: escalating tariffs from China, while preparing for further protectionist measures from the US. European companies are caught in the crossfire.

And if the US blocks Chinese goods with high tariffs, these goods could flood European markets, pressuring the EU to either protect its industries with tariffs or brace for the economic repercussions.

China, in turn, would likely retaliate, creating a cycle that could dampen economic growth globally. The IMF estimates that if Mr Trump’s tariffs come to fruition, global economic output could decline by 0.8 per cent next year and by up to 1.3 per cent by 2026.

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These economic headwinds would likely increase inflation in the US - driving up costs for American consumers and businesses - but could slow growth in Europe and Asia, where economies depend heavily on free trade.

For Europe, where manufacturing exports are a backbone of the economy, the implications are severe. The EU’s car and tech sectors are particularly exposed. Firms like Volkswagen and Siemens should be preparing for increased production costs if trade barriers rise.

Amid Europe’s struggle with China over EV tariffs, a simultaneous tariff hike from the US could multiply these pressures, affecting Europe’s competitiveness, which already lags the US on key economic indicators like productivity.

Making matters worse, countries in Europe and Asia are expected to retaliate if Mr Trump enacts high tariffs, especially if these measures affect their exports to America, the world’s largest economy. Europe could form a coalition to counter US trade policies, presenting a united front alongside Asia to mitigate the damage.

For China, already entrenched in a trade standoff with the EU, the country now faces further pressure. Mr Trump’s proposed tariffs could hit Chinese exports hard, and be potentially used as a negotiating tool in future trade talks.

Mr Trump’s re-election comes as official data show Chinese exports rose sharply in October. But this is expected to only heighten tensions with the US.

If Mr Trump moves forward with steep tariffs, China is expected to counter with a stimulus package and possibly a depreciation of the renminbi to stay competitive. However, this tactic could prove risky if US inflation keeps interest rates higher for longer, which would limit China’s options.

While China might hope for support from Europe, recent EU tariffs on Chinese EVs complicate this alliance. With countries like Germany heavily tied to both the US and China, European unity could face a stress test, as member states pursue different responses based on their economic interests.

China’s strategy includes strengthening its European presence by building manufacturing facilities in countries such as Hungary and Sweden. This move allows Chinese firms to avoid tariffs while retaining access to European markets – a tactic resembling Japan’s response to American tariffs in the 1980s.

Still, if Mr Trump’s tariffs are implemented, businesses and consumers will bear the burden of increased costs across major markets. Europe’s manufacturing sector, from automotive to electronics, will be hit especially hard.

Service sectors may not be immune, either; the indirect effects of rising costs will likely trickle down. Companies may pass on these added expenses to consumers, leading to higher prices for electronics, household goods and more.

Some European companies may even scale back US operations, diverting resources to markets less affected by tariffs.

As Mr Trump’s second term unfolds, global trade is becoming more fractured, with the US, China and the EU each pursuing their own interests amid rising tensions.

Mr Trump’s proposed tariffs, if enacted, could effectively force countries to choose alliances or seek new markets. Multinational companies caught in the crossfire may face higher costs and disrupted supply chains.

The interplay of these policies could reshape the global economic order, testing whether strategic competition can coexist with the shared goals of stability and growth. The outcome will likely define not only the next few years but perhaps the global trade paradigm for the foreseeable future.

Richard Baldwin is professor of International Economics at IMD