It’s not yet clear whether Trump’s threat of tariffs on the EU are intended as a shock and awe tactic to boost US exports or a more considered effort at reshaping global trade. Either way, we’re in for a period of economic volatility, says Andrew Hammond
China, Canada, and Mexico are in the process of responding to tariffs imposed from February by US President Donald Trump. However, it is the EU which is most exposed on what comes next.
US Commerce Secretary-nominee Howard Lutnick has hinted that some of Trump’s tariffs – like the ones aimed at Mexico and Canada – are short-term tactics that countries can avoid if they bend to the US president’s demands. Others, however, including potentially toward the EU, may serve longer-term goals of reshaping global trade and manufacturing.
The EU exports more goods to the United States than Canada, Mexico and China. Moreover, unlike China, the EU’s trade deficit with the United States has grown since 2016 when Trump was first elected to the US presidency.
Trump is ever unpredictable, but there are signs that he may wait for some weeks before potentially imposing any such trade measures on the EU and some other powers. This was outlined in the ‘America First Trade Policy’ memorandum he released on his first day back in office on 20 January. This points to a potential, multi-month window of opportunity for Europe to try to lobby Trump, and strike new economic bargains.
For instance, Trump has previously demanded that “the one thing they [the EU] can do quickly is buy our oil and gas” when asked how Europe could avoid heavy tariffs. So this appears part of a policy by Trump to ramp up US fossil fuel production and exports to deliver on his ‘America First’ strategy.
Following Russia’s invasion of Ukraine in 2022, the United States is already the EU’s second-largest gas supplier of Liquified Natural Gas (LNG). To date in 2025, EU countries have imported over half of their LNG from the United States.
European Commission President Ursula von der Leyen has given a potential green light to importing more US LNG, displacing Russia LNG. She said recently “it’s something where we can get into a discussion, also [where] our trade deficit is concerned”.
The EU is vulnerable to tariffs
The EU is vulnerable to new US tariffs, however, the UK government believes that Britain may escape this fate as its trade balance with the United States is much more balanced than the EU’s. Trump said last month that “we have a $350bn deficit with the EU. They treat us very very badly, so they’re going to be in for tariffs”.
Trump’s 20 January memo indicates that his team will seek to develop analyses of persistent US trade deficits, perceived unfair trade practices and currency manipulation among partner countries. It also asks, before 1 April, for recommendations on remedies, including a potential “global supplemental tariff”.
In theory at least, this review creates a potential multi-month window for Europe and other powers to try to lobby the new administration. It also allows time too for any internal disagreements within the Trump team to be resolved about how best to implement any future tariffs.
Any US move to impose much higher tariffs on the EU, as Trump has threatened many times in the past, could badly damage Europe’s economy. Moreover, higher US tariffs on China could redirect cheap products to Europe, undermining the bloc’s domestic manufacturers.
A key further question for business, is whether there will be reciprocal moves by Europe and other powers in response that potentially ultimately lead into ‘trade war’ territory. The long era of expansion of international trade as a share of global GDP is probably now at an end, however, in historical terms there could be a long way to fall downwards, based on long run averages over the last couple of centuries.
The long era of expansion of international trade as a share of global GDP is probably now at an end, however, in historical terms there could be a long way to fall downwards, based on long run averages over the last couple of centuries
Trump’s political style is to try to knock his opponents off-balance with unpredictable, ‘shock and awe’ tactics. So markets may be very volatile in coming weeks as this all plays out. The best case scenario for business may be that after initial market gyrations, the aftershocks will lessen.
However, this cannot be taken for granted. As the IMF highlighted last Autumn, there has been a big disconnect in recent years between higher geopolitical risk and lower market volatility.
This indicates that asset prices may not fully reflect the potential impact of wars and trade disputes. Such a disconnect makes shocks more likely, because higher geopolitical tension could trigger immediate sell-offs in financial markets and prompt volatility to snap back as it catches up to such uncertainty.
So there is no guarantee that this disconnect will continue in the next few years which could heighten economic volatility. In such scenarios, some financial institutions may be forced to sell assets or deleverage balance sheets to meet margin calls or satisfy risk limits, potentially exacerbating market sell-offs.
Andrew Hammond is an associate at LSE IDEAS at London School of Economics