EU and UK Face Uncertain Future as Tariffs Loom, Threatening Global Economic Stability

What's at Stake for the EU and UK?

Following his announcement of tariffs on Canada, Mexico, and China, Donald Trump has threatened to target the European Union next. Meanwhile, the UK remains "out of line" but could still reach a deal, according to Trump.

A Large Goods Deficit in the Crosshairs

The US has the world's largest trade deficit in goods, with imports exceeding exports by $1 trillion. Trump blames this deficit on "unfair" trade practices and sees it as a sign of weakness in the US economy.

The EU is the second-largest contributor to this deficit, after China. However, taking services trade into account significantly reduces the deficit with the EU due to large volumes of transatlantic trade in financial services, intellectual property, and other professional sectors.

A More Balanced Relationship

The UK has a more balanced trade relationship with the US. The US is Britain's largest single export market for goods, but services trade is significantly larger. Interestingly, the UK and the US report trade surpluses with one another due to differences in data collection.

Ireland and Germany Most Exposed

Should Trump impose tariffs on the EU, some countries will be hit harder than others. Germany has the most goods exports to the US, while the Netherlands imports the most goods from the US. However, Ireland has the largest share of exports to the US relative to its total trade.

Cars, Chemicals, and Medicines Most Exposed

The most heavily exposed sectors in the EU and UK are car manufacturers, chemicals firms, and pharmaceutical companies. These sectors account for the largest share of goods exports to the US.

Potential Economic Consequences

Economists warn that Trump's tariffs could stoke US inflation and hit economic growth. The National Institute of Economic and Social Research estimates a 10% tariff on all US imports could reduce global growth by about 1% over the next two years.

Borrowing costs for governments have also risen sharply due to investor fears over inflation. This presents a dilemma for the UK government, as higher borrowing costs could break its fiscal rules.

Uncertainty Remains

While Trump has announced a one-month "pause" in the threatened tariffs, much uncertainty remains. The EU has said it will stand up for itself if targeted, while the UK now negotiates alone after Brexit.

The potential economic consequences of a trade war are significant, and it remains to be seen how this situation will unfold.