Written by Tomasz Wieladek, chief European economist at T. Rowe Price
US President Donald Trump’s announcement of a sweeping 50% tariff on all European Union imports, effective June 1, has surprised markets and analysts. The general expectation was that negotiations would continue throughout the 90-day exemption period and likely beyond.
The move, framed by President Trump as a response to stalled negotiations and what he described as the EU’s ‘very difficult’ trade posture, marks a dramatic escalation in transatlantic economic tensions. Up until now, there was a broad optimism, both among financial markets and official institutions, that a positive negotiation outcome could be reached. This optimism now seems misplaced.
Credible retaliation will be challenging. With a NATO summit on the horizon, any countermeasures risk entangling trade disputes with broader security cooperation – something European countries have been trying to avoid.
Furthermore, the single largest imported good from the US is LNG. Europeans will not want to add additional costs to already high energy costs in Europe, as such a retaliation strategy may prove politically unsustainable. There is no easy way out of the current situation.
These developments have important consequences for the European economic outlook and monetary policy, even if an agreement is found relatively quickly. Consumers will save a bit more, and investors will invest less. Economic activity will weaken, as will inflation. In light of this news, it is likely the ECB will cut its deposit rate to 1.25% this year, but the risk is that it falls below this already low level if the trade confrontation continues for the next couple of months.
