End of an Era?
On April 2nd, named ‘Liberation Day’ by the United States’ (US) administration, President Trump announced a near universal tariff of 10% on all imported goods, with limited exemptions. Certain trading partners received even higher ‘reciprocal’ tariffs. This was the case for the European Union (EU), which was hit with a staggering 20% tariff,[1] although these have since been paused. This is in addition to the tariff of 25% applied to automobiles, steel and aluminium.[2] The tariffs, even of 10%, will hurt the European economy in a time of predicted slowdown. The economic relationship between the US and the EU has long been prosperous for both. As the most integrated economic relationship in the world, €1.6 trillion of goods and services were traded between the two in 2023, over €4.4 billion per day.[3] With the US no longer championing the multilateral trading system and the apparent decline of trans-atlanticism, a new era of protectionism and geopolitical rivalries could be ushered in. So, where does this leave the EU?
Building Bridges
For one, the assumption that countries will inevitably follow the US’ lead in embracing protectionism is highly debatable. The EU has long been a proponent of the open, rules-based international order, and recognizes that a stable and predictable trading environment is vital for the European economy. The bloc, which is highly reliant on both imports and exports,[4] has over 40 individual trade agreements with 78 countries in place, ranging from free trade agreements (FTAs) to customs unions. Additionally, 27 countries’ agreements are in the process of ratification, and a further 7 are currently being negotiated.[5] Considering the importance of the EU-US trading relationship, diversification will be necessary. Brussels should use this opportunity to position itself as a reliable and strategic partner, enhancing its existing agreements with allies and building new ties with emerging markets.
The EU is pushing especially hard to conclude trade agreements with India, Indonesia and Malaysia. A potential FTA with India would be a major win for proponents of free trade, as an agreement of this size would result in a multi-billion-euro income gain. Roadblocks persist, however, in the areas of agriculture, automobiles and pharmaceuticals, as well as on EU environmental regulation. Despite these hurdles, the agreement is expected to be concluded by the end of the year. [6] There is also the case of the Mercosur FTA, comprised of South American countries, which was finally concluded following 25 years of negotiations. The FTA would see the elimination of tariffs on 90% of goods, saving EU exporters around €4 billion a year. While France has been attempting to block the agreement on the grounds of destabilizing agricultural competition, it appears a compromise could be on the horizon, in the form of an emergency break for sensitive goods.[7] Additionally, on April 10th, the EU and the United Arab Emirates agreed to launch negotiations for a FTA, which will be especially vital for strategic European sectors involving critical minerals, renewable energy and green hydrogen.[8]
There is also the possibility that relations with China could thaw. Vice Premier He Lifeng, speaking recently with EU trade representative Maros Sefcovic, proposed that the two should work together to protect the multilateral trading system from protectionist forces.[9] EU member-states have not yet adopted a unified position on the world’s second largest economy, but the EU did label China a ‘systemic rival’ back in 2019.[10] In 2021, the Comprehensive Agreement on Investment, a deal negotiated between the EU and China, was frozen by the European Parliament largely on the basis of human rights abuses.[11] However, some member-states have opted, instead, to strengthen their ties with Beijing. Spain, the fastest-growing economy in Western Europe, has welcomed large-scale Chinese investment.[12] In spite of the EU’s apprehension, moving away from Washington would likely require more business with China.
Market Makeover
In addition to looking elsewhere, the EU should also look inwards. The single market, which came into force in 1993, has been the cornerstone of European integration, serving nearly half a billion consumers, and contributing 56 million jobs and around 8% to 9% to the EU’s GDP. However, the trading bloc remains highly fragmented.[13]As former European Central Bank President Mario Draghi points out, the trade among EU countries equals less than half of that taking place across US states, even less so when considering solely trade in services. One of the factors he identifies as the cause are internal barriers.[14]
According to the IMF, internal barriers are the equivalent of a 45% tariff on manufacturing and 110% on services, which is far higher than the US tariffs being imposed on European enterprises.[15] In comparison, the EU’s external tariff rate averages only around 3%. Difficulties regarding the movement of people is one such barrier. Currently, the cost of the movement of labour between EU countries is 8 times higher than between US states, preventing talent agglomeration and stifling innovation. The single market remains incomplete, leading to less investment and innovation, and thus less growth and productivity.[16]
Deepening and enlarging the single market can be the solution to Europe’s economic problems. It could raise productivity by around 7 percentage points long term. To reduce these barriers, however, there must be investment into cross-border infrastructure, liberalization of protected sectors, such as financial services and telecommunications, and harmonization of regulation across EU states. This will all require EU-level coordination to prevent spillovers and the undermining of competitive advantage.[17] A better functioning and well-integrated single market will be necessary to deal with the green and digital transitions pursued by the EU, as well as manage the current geopolitical and economic challenges facing the continent.
[1] Harithas, B., Meng, K., Brown, E., Mouradian, C., “Liberation Day” Tariffs Explained, CSIS, 3 April 2025.
[2] Botwright, K. & Doherty S., Trump tariffs: Visualising new US trade restrictions, World Economic Forum, 7 April 2025 (updated).
[3] European Council, EU Relations with the United States, 9 April 2025 (last reviewed).
[4] Directorate-General for Trade, Strategic Plan 2020-2024, European Commission, 14 September 2020.
[5] European Commission, Negotiations and agreements.
[6] Kar, J., The EU and India are close to finalizing a free trade agreement. Here’s what to know, World Economic Forum, 7 March 2025.
[7] Faiola, A., Spurned by Trump, Europe and China weigh closer economic ties, The Washington Post, 4 April 2025.
[8] Bounds, A. & Cornish, C., EU agrees to start trade talks with UAE after Trump tariff war, Financial Times, 10 April 2025.
[9] McElwee, L., The Rise and Demise of the EU-China Investment Agreement: Takeaways for the Future of German Debate on China, CSIS, 20 March 2023.
[10] Foy, H., Dubois, L., Jopson, B., Leahy, J., Spain calls for EU to forge China policy without US, Financial Times, 24 February 2025.
[11] McElwee, L., The Rise and Demise of the EU-China Investment Agreement: Takeaways for the Future of German Debate on China, CSIS, 20 March 2023.
[12] Faiola, A., Spurned by Trump, Europe and China weigh closer economic ties, The Washington Post, 4 April 2025.
[13] Ragonnaud, G., Deepening the single market in the light of the Letta and Draghi reports, European Parliament, October 2024.
[14] Draghi, M., Forget the US — Europe has successfully put tariffs on itself, Financial Times, 14 February 2025.
[15] Draghi, M., Forget the US — Europe has successfully put tariffs on itself.
[16] Kammer, A., Europe’s Choice: Policies for Growth and Resilience, International Monetary Fund, 16 December 2024; International Monetary Fund, Regional economic outlook. Europe: a recovery short of Europe’s full potential, October 2024.
[17] Kammer, A., Europe’s Choice: Policies for Growth and Resilience.
