Why a tariff standoff with the EU could hurt the US more than it helps

As the world watches, President Donald Trump is poised to escalate a brewing trade battle with America’s largest trading partner, the European Union, a move economists warn could ultimately backfire on the United States more than it benefits it.

Having already slapped a 20% import duty on EU goods in April, Trump temporarily scaled it back to 10% in response to market jitters and to leave room for negotiations. But with a July 9 deadline looming and frustration mounting over the EU’s trade stance, the president has now threatened to hike tariffs on European exports to an eye-watering 50%.

If enforced, that could make a wide array of goods from French cheese and Italian leather to German electronics and Spanish medicines significantly more expensive in US stores.

The EU has signalled it is ready to retaliate with tariffs on hundreds of American products, including beef, auto parts, aircraft and even beer potentially dragging both economies into a protracted and damaging trade war.

The stakes are high in transatlantic trade

The United States and the European Union together account for the world’s most significant commercial relationship, with bilateral trade in goods and services reaching €1.7 trillion ($2 trillion) in 2024  or about €4.6 billion per day, according to Eurostat.

Europe is a major buyer of U.S. crude oil, pharmaceuticals, aircraft, and cars, while the U.S. imports high volumes of European cars, chemicals, wine, and medical devices. While Trump has fixated on the EU’s €198 billion ($233 billion) surplus in goods, U.S. dominance in services such as cloud computing and legal consulting helps offset that imbalance, bringing the real trade deficit down to roughly €50 billion ($59 billion).

But Trump’s focus on goods, and his calls for “fair” trade, have prompted a sharp shift in tone from prior administrations which typically kept tariffs low 1.47% on EU imports to the US and 1.35% in reverse and engaged in more collaborative trade talks.

US consumers and businesses may pay the price

Raising tariffs may appeal to Trump’s base as a show of economic strength, but analysts warn the fallout will likely be felt at home and soon. Higher import costs almost always translate into higher retail prices for consumers, especially for goods with few domestic substitutes.

European luxury carmakers like Mercedes-Benz, which assembles some vehicles in Alabama, say they can cushion some of the blow for now. But across the board, auto prices and the cost of consumer goods are expected to climb if tariffs rise sharply. Makers of spirits like Italy’s Campari Group have hinted they may absorb or adjust prices based on market conditions, but warn that long-term uncertainty could harm competitiveness.

“This kind of tariff escalation could squeeze US households at a time when inflation remains a sensitive political issue,” warned Holger Schmieding, chief economist at Berenberg Bank as reported by AP.

Meanwhile, US manufacturers that rely on imported parts could also suffer, with ripple effects through supply chains and job markets. Though Trump argues that restricting foreign imports will fuel a revival in domestic manufacturing, most analysts say such a shift would take years,  if it materialises at all.

Trade tensions mask deeper issues

Trump has also taken aim at deeper policy issues including EU food safety rules that restrict products like chlorine-washed chicken and hormone-treated beef and Europe’s value-added tax (VAT), which ranges from 17% to 27%. But economists argue VAT systems are trade-neutral and aren’t typically negotiated in trade deals. The EU, for its part, insists its consumer and environmental regulations are non-negotiable.

“The EU cannot rewrite its internal market rules just to satisfy US complaints that often reflect misunderstandings about how Europe operates,” Schmieding said.

Could the US economy take a bigger hit?

A failure to reach a deal could be more economically painful for the US than the EU. A review by Brussels-based think tank Bruegel estimates that in the event of tariffs rising to 25%, US GDP could shrink by 0.7%, while the EU’s economy would lose around 0.3%.

Some multinational companies, like luxury giant LVMH, have floated the idea of shifting more production to the U.S. to avoid tariffs, but warn that such decisions are costly and may ultimately depend on whether a deal is reached.

With a tight deadline ahead, both sides may opt for a temporary framework that averts the worst-case scenario. Still, many in Europe believe the U.S. may back down from the most extreme tariff threats not out of goodwill but because of domestic economic realities.

“Trump may claim victory by rolling back some of the harsher threats,” said Schmieding. “But if tariffs remain high, it’s the American consumer who will bear the brunt.”

With inputs from agencies