The Impact of the U.S. Election on the European Economy: A Tariff-Focused Analysis

The Impact of the U.S. Election on the European Economy: A Tariff-Focused Analysis

Farhad Reyazat – PhD in Risk Management (Biography)

Global economies are bracing for potential policy changes with the U.S. presidential election fast approaching. As one of the U.S.’s most significant trade partners, Europe could face substantial economic ramifications depending on the election’s outcome. As suggested in recent discussions, the focus on higher tariffs could drastically alter trade, currency values, and foreign relations. Let’s take a closer look at the potential economic impacts on Europe.

Trade Relations: $1.3 Trillion in Bilateral Trade at Risk

The trade relationship between the European Union and the U.S. is one of the largest in the world. In 2022, bilateral trade between the two regions reached an impressive $1.3 trillion. However, the potential for higher U.S. tariffs could significantly disrupt this balance, particularly affecting industries like automotive and technology.

According to UBS’s analysis, higher tariffs on goods like European cars and industrial products could cut EU exports to the U.S., particularly impacting the automotive industry, which accounted for $67 billion in exports. During previous trade tensions, European steel exports to the U.S. dropped by 30% following tariffs, signaling the level of disruption that could occur again.

Currency Fluctuations: A Stronger Dollar Could Shift the Balance

Currency exchange rates are crucial in determining trade balances and economic stability. Historically, U.S. tariffs have strengthened the dollar, which could result in a competitive advantage for European exporters by making their products cheaper in the U.S. market. However, the flip side is that European companies importing U.S. goods, such as technology and industrial machinery, could face higher costs due to a stronger dollar.

According to the European Central Bank, a 10% depreciation of the U.S. dollar against the euro could reduce eurozone exports by 5%. If the next administration raises tariffs and strengthens the dollar, it could create opportunities and challenges for European markets.

Foreign Policy Shifts: European Investment in the Crosshairs

Foreign policy is another area where the U.S. election could profoundly affect Europe. The potential for strained U.S.-China relations and a focus on tariffs and protectionist measures could lead Europe to reconsider its global partnerships. The European Union’s trade with China hit over $700 billion in 2022, and higher U.S. tariffs on Chinese goods could cause significant market volatility, indirectly affecting Europe’s economy.

Moreover, a potential U.S. shift in foreign policy priorities could impact Europe’s heavy reliance on U.S. security alliances like NATO, where $350 billion was spent on defense in 2023. Reduced U.S. support could push European nations to increase defense spending, potentially at the expense of economic growth and social programs.

Tariff Impacts on European Industries

The impact of higher tariffs will not be limited to specific sectors. According to the UBS report, U.S. tariffs on European imports would target key industries like machinery, pharmaceuticals, and consumer goods, which are some of the EU’s top export categories to the U.S. The rise in tariffs could reduce the competitiveness of European products in U.S. markets, potentially causing job losses and slowing down economic growth in Europe.

For instance, pharmaceuticals account for $89 billion in EU exports to the U.S., making it one of the largest export sectors. If tariffs are imposed on these products, the ripple effect on European manufacturers could be significant, potentially stifling innovation and raising consumer costs in both regions.

Climate Policy: A Global Push or Pullback?

Climate policy is another area where U.S.-EU collaboration could be affected. Europe’s green economy was valued at $1.5 trillion in 2022, with investments surging into renewable energy sectors like wind and solar power. Should the U.S. elect a government that prioritizes environmental regulation and sustainable development, there could be increased synergy between the two regions.

However, a rollback of environmental policies by the U.S. could slow down joint efforts to combat climate change, hindering European initiatives to reach carbon neutrality by 2050. Higher tariffs on green technology could further complicate transatlantic cooperation in the renewable energy sector, slowing progress in both regions.

Financial Markets: Volatility and Investor Sentiment

Financial markets are susceptible to changes in U.S. leadership and policy direction. Following the 2016 election, the Euro Stoxx 50 index experienced a 4.5% decline, reflecting investor uncertainty. The 2024 election could spark similar volatility, especially if the U.S. implements policies that are perceived as protectionist or if tariff increases affect key European industries.

Higher tariffs could also shift investment flows. The UBS report notes that a more aggressive U.S. tariff policy could lower global risk appetite, leading to capital outflows from European markets. In particular, the technology and financial sectors, representing more than 30% of European market capitalization, could face downward pressure due to uncertainty in transatlantic trade relations.

Conclusion: Preparing for Economic Waves

The 2024 U.S. election could create a chain reaction across the Atlantic, impacting European trade, currency values, and industries. Higher tariffs, as highlighted by UBS, could disrupt the strong trade relationship between the U.S. and Europe, affecting industries like automotive, pharmaceuticals, and green energy. With over $1.3 trillion in bilateral trade at risk, Europe must brace for potential changes while focusing on strategic partnerships and market resilience.

Whether through tariffs, foreign policy shifts, or changes in financial markets, Washington’s decisions will leave a lasting impact on the European economy. Understanding these risks and preparing for policy shifts will be critical for European leaders and businesses navigating this uncertain global landscape.