As transatlantic trade tensions intensify, European policymakers face critical decisions regarding their economic strategy. With U.S. proposals for 50 percent tariffs on EU imports gaining political momentum, the continent must determine whether to strengthen multilateral frameworks, pursue new trade partnerships, or risk economic fragmentation through protectionist policies.
This analysis examines three potential pathways for Europe’s trade policy development, evaluating options that include reinforcing international institutions, expanding trade diversification, reducing domestic protectionism, and enhancing internal economic resilience.
International trade has been fundamental to Europe’s post-war economic success. It enables specialization according to comparative advantages, increases market competition, lowers consumer prices, and stimulates technological innovation. For the European Union, trade represents approximately 35 percent of GDP, directly supporting millions of jobs connected to import and export activities. Global market access has driven EU economic expansion, improved living standards, and supported industrial modernization.
Trade expansion creates economies of scale, enabling companies to reduce production costs while investing in innovation. It promotes efficient resource allocation by directing capital to its most productive applications and encourages domestic industries to enhance performance through global competition. Consumers benefit from lower prices, improved product quality, and greater choice, all of which increase purchasing power and overall economic well-being.
Exports remain a crucial growth driver. In the EU, export-focused sectors such as automotive manufacturing, machinery production, and pharmaceutical development significantly contribute to employment and research investment. Open trade policies also attract foreign direct investment, promoting capital formation and productivity improvements across the continent. While certain sectors may experience short-term losses, trade ultimately supports long-term wage growth and improves working-class economic conditions.
From a macroeconomic perspective, trade enhances fiscal sustainability by expanding tax bases through economic growth. It also strengthens economic resilience, as diversified trade relationships can mitigate the impact of regional or sector-specific downturns.
Historical evidence demonstrates the economic costs of protectionism. The 1930 U.S. Smoot-Hawley Tariff Act, which increased duties on over 20,000 imported goods, triggered a collapse in global trade and exacerbated the Great Depression. More recently, the 2018-2020 U.S.-China trade conflict disrupted global supply chains, with European businesses caught in the crossfire. German automakers faced higher costs for American components, while EU agricultural exports to China declined due to changing demand patterns. German economic institute Ifo estimates this trade conflict could reduce Germany’s GDP growth by 0.3 percentage points in the current year.
These examples illustrate how protectionist policies can create economic spillovers even when targeting third parties. For the EU, the implications are clear: maintaining open trade and resisting protectionist tendencies are essential for economic stability and global competitiveness.
Despite positioning itself as a champion of free trade, the EU has increasingly adopted protectionist measures. The Common Agricultural Policy provides substantial subsidies to European farmers, often distorting competition and limiting market access for agricultural exporters from developing countries. The bloc maintains high external tariffs on certain food products, textiles, and footwear – sectors where developing economies typically hold competitive advantages.
Recent EU regulations, while presented as sustainability or security initiatives, often function as de facto trade barriers. The Carbon Border Adjustment Mechanism imposes levies on imported goods based on carbon content, raising concerns among emerging economies about potential green protectionism. Strategic autonomy initiatives focusing on localized production of semiconductors, pharmaceuticals, and critical raw materials may further reduce openness to global markets.
The EU’s increased use of trade defense instruments, including anti-dumping duties and safeguards, often serves domestic political objectives rather than addressing genuine trade imbalances. As global trade tensions mount, Europe faces a pivotal decision: it can either reduce its own protectionist measures and lead efforts to revitalize open markets, or it can escalate trade conflicts through reciprocal protectionism. While the latter approach might offer short-term political advantages, it risks long-term economic fragmentation, reduced innovation, and diminished consumer welfare.
The liberal trading system faces increasing strain from rising protectionism and economic coercion. Europe, deeply integrated into the global economy, remains particularly vulnerable to these shifts. The European Commission has already revised its 2025 GDP growth forecast downward to 0.9 percent, citing U.S. tariffs as a significant factor. Several strategic responses remain available to Europe as it prepares for ongoing trade tensions.
Three potential scenarios emerge:
1. Most likely: Regional fragmentation and selective retaliation (50 percent probability)
Global trade may fracture into competing blocs, with the EU facing U.S. tariffs and responding with protective measures. Retaliatory tariffs, industrial subsidies, and investment restrictions would increase across the board. U.S.-European trade would decline significantly as protectionist dynamics intensify. Strategic autonomy projects would expand while multilateral cooperation remains stalled. Economic growth would slow amid heightened uncertainty, negatively impacting export-dependent sectors and industries reliant on imported inputs.
2. Unlikely: Contained trade tensions (30 percent probability)
Trade tensions would rise but remain limited to symbolic tariffs and diplomatic rhetoric. The EU would avoid major disruptions through cautious diplomacy and defensive trade policy while maintaining current trade barriers. This scenario assumes successful de-escalation through diplomatic channels, though rising tensions with the current administration limit any return to proactive free trade leadership.
3. Least likely: Full-scale trade war involving the EU (20 percent probability)
The EU would become a central participant in a global trade conflict, with tariffs, sanctions, and regulatory restrictions proliferating. Both trade and investment flows would contract sharply, devastating transnational supply chains and consumer markets. Europe would adopt a hardline stance, insulating its economy with comprehensive trade barriers while geopolitical polarization deepens.
While this final scenario remains less probable, the risk remains real – particularly if diplomatic miscalculations or external shocks trigger an escalation spiral. The economic costs in terms of lower GDP and wage growth would be substantial, serving as a decisive factor deterring the EU from pursuing this path.
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Europe’s options in a trade war
As U.S.-EU trade tensions rise, Europe must choose between reinforcing multilateralism, diversifying trade or risking fragmentation.
As global trade tensions escalate between the United States and major economies worldwide, Europe faces significant challenges safeguarding its economic interests. The recent proposal by U.S. President Donald Trump to impose a 50 percent tariff on imports from the European Union underscores the urgency for the bloc to strategize effectively.
This report outlines three potential scenarios for Europe in the context of a trade war and evaluates strategic options, including reinforcing multilateral institutions, diversifying trade partnerships, rolling back its own protectionist measures and bolstering internal resilience.
The value of international trade
International trade has been a cornerstone of Europe’s post-war prosperity. It allows countries to specialize in sectors where they have comparative advantages, enhances competition, reduces consumer prices and spurs innovation. For the EU, trade accounts for around 35 percent of its gross domestic product (GDP), and millions of jobs are linked directly to exports and imports. Access to global markets has fueled the EU’s economic growth, raised living standards and driven industrial development.
Trade increases economies of scale, allowing firms to reduce costs per unit of output and invest in new technologies. It promotes efficiency by allocating resources to their most productive uses and encourages domestic industries to improve performance through exposure to international competition. For consumers, trade results in lower prices, higher quality and greater variety, contributing directly to their purchasing power and overall welfare.
Exports are a critical engine of growth. In the EU, export-oriented sectors such as automotive, machinery and pharmaceuticals contribute significantly to employment and R&D spending. Open trade also attracts foreign direct investment, fostering capital formation and productivity gains across the continent. Thus, trade contributes to real wage growth in the long run and improves the economic conditions of the working class, although short-term losses may occur in specific sectors.
From a macroeconomic perspective, trade supports fiscal sustainability by broadening the tax base through economic growth. It also strengthens economic resilience, as diversified trade relationships can cushion the impact of regional or sector-specific downturns.
The costs of protectionism: Lessons from history and today
While protecting domestic industries may seem politically appealing, history shows that protectionism often leads to inefficiency, higher consumer prices and retaliation. A notable example is the Smoot-Hawley Tariff Act of 1930 in the U.S., which raised tariffs on over 20,000 imported goods. The result was a collapse in global trade and a deepening of the Great Depression.
More recently, the U.S.-China trade war (2018-2020) serves as a cautionary example. The first Trump administration’s tariffs on hundreds of billions of dollars’ worth of Chinese goods – and China’s retaliatory tariffs – led to significant disruptions in global supply chains. European firms were caught in the crossfire: German automakers faced higher costs for U.S.-made components and EU agricultural exports to China suffered due to shifting Chinese demand patterns. Estimates by the Ifo Institute in Germany estimated that the current trade conflict may reduce German GDP growth by 0.3 percentage points this year.
These examples demonstrate that protectionism can have severe spillover effects even when targeted at third parties. For the EU, the implications are clear: Maintaining open trade and resisting protectionist impulses are vital for economic stability and global competitiveness.
Europe’s own protectionist dilemma
While the EU has long presented itself as a champion of free trade and multilateralism, it has increasingly adopted protectionist policies. The EU’s Common Agricultural Policy, for instance, provides substantial subsidies to European farmers, often distorting competition and limiting market access for agricultural exporters from developing countries. Similarly, the bloc maintains high external tariffs on certain food products, textiles and footwear – areas where developing economies often have a comparative advantage.
In recent years, the EU has also introduced regulations that, while framed as sustainability or security measures, often function as de facto trade barriers. For instance, the Carbon Border Adjustment Mechanism imposes levies on imported goods based on their carbon content, raising concerns among emerging economies that it could be a form of green protectionism. Similarly, strategic autonomy initiatives, including efforts to localize the production of semiconductors, pharmaceuticals and critical raw materials, may further reduce openness to global markets.
Moreover, the EU’s use of trade defense instruments, such as anti-dumping duties and safeguards, has grown in frequency and scope. These measures are often employed in response to perceived unfair trade practices but may also serve domestic political objectives.
As global trade tensions mount, Europe faces a critical choice. It can either roll back its own protectionist measures and lead by example in revitalizing open markets, or it can escalate, retaliating against protectionism with protectionism. Although the latter may offer short-term political gains, it risks long-term economic fragmentation, diminished innovation and reduced consumer welfare.
A shifting trade landscape
The liberal trading order is under strain due to rising protectionism and economic coercion. Europe, deeply integrated into the global economy, is particularly vulnerable to these shifts. The EU’s economic growth has already been affected, with the European Commission downgrading its 2025 GDP growth forecast to 0.9 percent, citing U.S. tariffs as a significant factor. There are several strategic responses available to Europe to prepare and react to trade tensions.
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Europe is navigating a period of heightened trade volatility. While a full-scale trade war remains unlikely, the risk of regional fragmentation is relatively high. Taking proactive steps, including strengthening multilateral institutions, diversifying trade partnerships and bolstering internal resilience, are essential. Europe’s most effective path forward lies in a flexible yet firm trade strategy, anchored in multilateralism and strategic autonomy. While reducing protectionism could support long-term economic prospects, ongoing diplomatic tensions with the U.S. could complicate this approach.
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Scenarios
Most likely: Regional fragmentation and selective retaliation
Global trade may fracture into competing blocs in the future. The EU faces U.S. tariffs, such as the proposed 50 percent tariff on imports from the bloc, and responds with protective countermeasures. Retaliatory tariffs, industrial subsidies and investment restrictions increase across the board. U.S.-European trade declines significantly. Protectionist dynamics intensify, and the EU reinforces its defensive trade posture. Strategic autonomy projects expand while multilateral cooperation remains stalled. Growth slows amid heightened uncertainty, and sectors reliant on exports as well as imported inputs suffer.
Likelihood: 50 percent. Given the current diplomatic climate and economic pressures, this is the most likely path. A breakdown in transatlantic dialogue and fear of strategic dependence push the EU toward entrenched protectionism. This scenario would be regrettable from a free-trade perspective, but it is by no means the worst.
Unlikely: Contained trade tensions
Trade tensions rise but remain limited to symbolic tariffs and diplomatic rhetoric. The EU avoids major disruptions through strategic caution and defensive trade policy. While avoiding full escalation, Europe refrains from meaningful liberalization due to the political climate. The EU maintains its current trade barriers and defensive mechanisms, focusing instead on managing exposure to volatile trade partners.
Likelihood: 30 percent. This scenario assumes the EU succeeds in de-escalating conflict through diplomatic channels, but rising tensions with the second Trump administration limit any return to proactive free trade leadership. It seems rather unlikely that the EU will yield to the White House’s criticism of European protectionism. Hence, from a free-trade perspective, contained trade tensions are the best scenario with a non-negligible likelihood of occurring.
Least likely: Full-scale trade war involving the EU
The EU becomes a central target in a global trade war. Tariffs, sanctions and regulatory restrictions proliferate. The EU retaliates forcefully, and both trade and investment flows contract sharply. A full trade war devastates transnational supply chains and consumer markets. Europe adopts a hardline stance, insulating its economy with sweeping trade barriers and reinforcing the single market. Geopolitical polarization deepens.
Likelihood: 20 percent. This scenario remains less probable, but the risk is real – particularly if diplomatic miscalculations or external shocks trigger a spiral of escalation. The economic costs in terms of lower GDP and wage growth would be substantial and are a decisive factor deterring the EU from going down this path.