Why Markets Stayed Calm After Trump’s 50% EU Tariff Threat

Despite a bold declaration by former President Donald Trump regarding a steep 50% tariff on all European Union imports, global financial markets exhibited a remarkably subdued reaction. This significant threat, made public shortly before scheduled US-EU diplomatic engagements, largely failed to incite the widespread panic one might expect.

Market Indifference Signals Negotiation Tactic

The muted market response was evident as the Stoxx Europe 600 index saw only a marginal 1% decline, a stark contrast to more significant downturns observed after similar threats in previous months. Financial analysts widely interpret this recent pronouncement not as an imminent policy shift, but rather as a strategic maneuver aimed at influencing forthcoming trade negotiations with Brussels.

Experts, such as Ajay Rajadhyaksha, global chair of research at Barclays, highlighted the nuanced phrasing used by Trump – he “recommended” the tariff rather than stating it would be imposed. This distinction reinforces the view that the threat is largely a bargaining chip. Rajadhyaksha conveyed to clients his belief that while analysts are making educated guesses, a 50% tariff on all EU goods is unlikely to materialize.

Economic Repercussions for Both Sides

While a 50% tariff is widely dismissed as improbable, analysts concede that the eventual tariff rate could still exceed initial expectations. Rajadhyaksha, for instance, revised his earlier forecast of 14-17% average tariffs upwards, suggesting a figure closer to 20% could be a realistic outcome.

Similarly, Andrew Kenningham, chief Europe economist at Capital Economics, concurred that while a 50% rate is highly unlikely for the long term, the possibility, however remote, is not zero. Kenningham detailed the severe economic repercussions should such a drastic measure be implemented, estimating a potential 1.7% contraction in Germany’s GDP over three years, with particularly adverse effects on Ireland if the pharmaceutical sector is targeted. He anticipates tariffs ultimately settling around 10%, but acknowledges a potentially turbulent path to agreement.

The economic burden on the United States would be equally significant. With $606 billion in European imports last year, a 50% tariff would impose a direct cost of over $300 billion. Analysis by Rajadhyaksha indicates that approximately 60% of this cost, equating to around $180 billion, would directly impact American consumers rather than European exporters. This scenario echoes the 2018 trade conflict with China, where the US ultimately deemed the economic cost too high. Analysts suggest a similar unwillingness to incur such a hefty price, especially with the EU being America’s largest trading partner.

Europe Prepares Countermeasures

European nations are not passive observers in this dynamic. Inga Fechner, a senior economist at ING, confirmed that the EU has already prepared retaliatory tariffs, poised for implementation by July 14 if the US proceeds with its threats. Fechner views Trump’s aggressive stance as a preliminary move in negotiation, mirroring past strategies, such as his approach before a temporary agreement with China.

Should discussions falter, Brussels has a broader arsenal than just tariffs. The EU could consider measures like stricter regulations on US technology firms, delaying new licenses, restricting access to public procurement, and curtailing investment and intellectual property access through its Anti-Coercion Instrument. Fechner warns that a full implementation of Trump’s threat could reduce the eurozone’s GDP by 0.6 percentage points, potentially pushing the bloc towards recession.

Salomon Fiedler, an economist at Berenberg, highlighted that both economic powers would suffer significantly from a 50% tariff. He also noted that increased cost pressures could compel the Federal Reserve to prolong elevated interest rates in the US, thereby delaying any potential rate cuts. Fiedler ultimately concludes that the self-inflicted economic harm for the US makes full implementation unlikely, though the threat itself could solidify a 10% baseline tariff Trump has already imposed on various trading partners.