On April 2—dubbed “Liberation Day” by the U.S. administration— President Donald Trump announced sweeping tariffs on nearly every country in the world, targeting both allies and rivals alike. These include a 34 percent tariff on China, 24 percent on Japan, 20 percent on the European Union, and double-digit tariffs on numerous others (which will be additive to preexisting tariffs). The measures were enacted through an executive order and justified under the International Emergency Economic Powers Act of 1977, which allows the president to bypass Congress despite Congress’s constitutional authority over trade policy.
At the core of Trump’s tariff plan is a flat, nonnegotiable 10 percent tariff on all imports from all countries, covering all products. An additional 25 percent levy applies specifically to automobiles. On top of this baseline, “reciprocal” tariffs are imposed based on the Trump administration’s unilateral interpretation of each country’s trade barriers. This approach sidesteps multilateral frameworks and rests on a dubious methodological foundation.
The so-called reciprocal tariffs are not grounded in any recognized economic methodology. Instead, they are calculated using a simple formula: the ratio of the U.S. bilateral trade deficit (in goods) with a given country to the total value of imports from that country. Where no deficit exists, a default tariff of 10 percent is applied. This method not only ignores broader macroeconomic drivers of trade balances—such as relative savings and investment rates—but also misrepresents trade policy asymmetries because it does not account for trade in services.
The administration has framed the baseline 10 percent tariff as a structural revenue-raising tool. With the United States currently collecting around $77 billion annually in tariff revenue—a figure that is in line with other advanced economies as a share of GDP—Trump’s team has floated projections of up to $800 billion under the new regime. However, this target appears highly unrealistic. Such revenue would require import volumes to remain constant despite the disincentive effects of the tariffs—an assumption at odds with both trade elasticity literature and historical precedent.
Moreover, tariffs are regressive in nature, disproportionately affecting middle- and low-income households through higher consumer prices. This runs counter to the broader aim of alleviating economic pressure on Trump’s core voter base. While some short-term gains in customs revenue are possible, they are unlikely to offset the inflationary costs or the loss of trade volume.
The strategic objective behind tariff rates above the 10 percent baseline appears to be to apply economic pressure to extract concessions—such as reshoring semiconductor production from Taiwan or encouraging pharmaceutical investment to shift from Switzerland to the United States.
However, this coercive approach could backfire by prompting retaliatory measures, disrupting global value chains, and incentivizing long-term decoupling from U.S. markets. Although it is too early to discern any efforts to restructure value chains, there is already solid evidence that retaliatory measures and decoupling are being contemplated seriously in national capitals around the world, including in the European Union.
Impact on Europe and Possible Response
U.S. tariffs have arrived at a difficult time for the European economy. The slow, halting recovery from the pandemic was upended in 2022 by the second Russian invasion of Ukraine, which generated significant supply-side inflationary impulses, particularly in energy, that further hobbled the EU economy. These difficulties have coincided with mounting concerns about the ability of Europe to compete over the long term with the more dynamic economies of the United States and China. Since the publication of the Letta and Draghi reports within a five-month period in 2024, Europe’s political and economic elites, in a manner reminiscent of the Japanese economic challenge of the 1980s that ultimately led to the Single European Act, have embarked on a sweeping reform debate that many have described as existential.
Even though the European Union is less exposed to the U.S. economy than Mexico, Canada, and some Asian countries, the economic impact of the tariffs will nevertheless be significant. Exports to the United States represent 2.1 percent of EU GDP. With a tariff of 20 percent, the potential initial impact on the European Union could be around 0.4 percent of GDP. This initially moderate effect could be amplified in a scenario of slowing global trade flows, retaliation, or escalation.
From a European perspective, the only redeeming feature of U.S. tariffs is their uniformity: The absence of discrimination by product or member state allows the European Commission to consider a coordinated response. The relatively higher tariffs imposed on Asian countries could also facilitate a coordinated response to U.S. tariffs with other countries. But that will not be easy. For example, U.S. tariff hikes on China may well end up generating a diversion of Chinese export goods to the European Union, which will put additional pressures on European producers and likely raise calls for a protectionist response from Brussels. Needless to say, this is how global trade wars start.
Nonetheless, crafting an effective response will be anything but straightforward. From an economic standpoint, refraining from retaliation may be preferable to avoid fueling inflation within the European Union. However, from a political perspective, demonstrating strength to the Trump administration may call for a firm response aimed at maximizing economic pressure. In addition, some member states like Spain and Italy are advocating for a more measured response, while others like France and Germany have called for more aggressive measures that focus on investment and trade in services, in which the United States has a large trade surplus with the European Union due to the strength of its tech companies.
Within this context, the European Union is likely to pursue a dual-track strategy: First, offer the United States tariff cuts in some sectors while implementing selective, targeted countermeasures—possibly focusing on goods produced in U.S. swing states (e.g., motorcycles (Wisconsin), playing cards (Kentucky), and the other usual suspects). Second, stimulate internal demand and competitiveness. While lowering interest rates or weakening the euro may fall outside the European Commission’s direct control, the bloc could increase public investment or accelerate industrial policy initiatives. The push to increase defense spending in response to perceived United States and NATO unreliability—evident both at the EU level (e.g., through initiatives such as ReArm Europe and Readiness 2030) and at the national level (e.g., Germany’s constitutional reform of the debt brake)—should be understood in this context. The European Union has already proposed eliminating tariffs on U.S. industrial goods entirely. Interestingly, this aligns with Elon Musk’s idea of creating a transatlantic free trade area—an initiative that, despite its appeal, is unlikely to materialize given the failure of similar efforts during more cooperative periods in the past.
But in the event the United States is not inclined to negotiate, the European Union is contemplating the activation of its Anti-Coercion Instrument, a novel trade-defense mechanism introduced as a response to U.S. threats to European companies during the first Trump administration. Though untested, it could provide a platform for the European Union to impose strong nontariff countermeasures on U.S. services, particularly in the digital and tech sector. Its activation, however, is not automatic. It requires a proposal by the European Commission that must then be approved at the Council of the European Union and necessitates the approval of a qualified majority: at least 55 percent of the member states (currently 15 out of 27) representing at least 65 percent of the total EU population.
Finally, the European Union will try to reduce internal economic barriers within its single market and intensify efforts to diversify export markets through new free trade agreements. The goal would be to de-risk from the U.S. economy, especially if the tariffs become a permanent feature of U.S. trade policy.
Nearly a week after the announcement of the tariffs, Trump and his officials have given no sign of changing course, despite the cratering of financial markets around the world and in the United States. There are signs, however, that all is not well inside the Republican coalition. Several prominent elected officials in the House and especially the Senate have voiced growing concerns about the economic impact of the tariffs, and even those considered to be members of Trump’s inner circle of Wall Street and Silicon Valley supporters have started asking for a pause from the administration.
Transatlantic trade relations since the 1940s have never been placid or uneventful. From chickens to steel, the United States and Europe have often disagreed with each other, sometimes vehemently. Yet Trump’s tariff policy represents a significant departure from decades of bipartisan U.S. trade consensus in favor of the general principle of open markets and free trade. The foundations of the Trump administration’s policy are analytically weak, and its global repercussions potentially severe. Although it may appeal to domestic constituencies seeking economic protectionism specifically and to America Firsters more generally, its long-term impact could be damaging for U.S. consumers, multilateral institutions, and the global trading system more broadly. And the damage to the transatlantic relationship will be profound, regardless of how the current dispute is eventually resolved.
Federico Steinberg is a visiting fellow with the Europe, Russia, and Eurasia Program at the Center for Strategic and International Studies in Washington, D.C. Jeffrey Anderson is a professor at Georgetown University specializing in comparative political economy and European integration, with a focus on Germany and the European Union.
