Since taking office, US President Donald Trump has announced a series of new tariff threats that are unprecedented in recent history in terms of their scope and scale. For Europe, they include tariffs of 20% on European Union countries, 32% on Switzerland, 16% on Norway and 10% on the UK.
For the EU, this 20% rate would apply to around €290bn of the goods it exports to the US. When including some €90bn of exports already hit by earlier tariffs on automobiles, steel and aluminum, roughly 2% of EU gross domestic product is now subject to US tariffs.
The president’s decision to authorise a 90-day ‘pause’ on the most recent reciprocal tariffs drew a positive response from financial markets. The EU has also said it will attempt to negotiate with the US administration over the coming weeks. But despite the back and forth, it appears likely that US tariffs in some shape or form will be a durable feature of the trading landscape. Sectors like semiconductors, pharmaceuticals, energy and energy products could also be subject to tariffs in the future.
For Europe’s open economies, the near-term economic effects will only be mitigated by greater defence and infrastructure spending. Based on tariff announcements to date, Ireland, Slovakia, Germany, Hungary, Italy and Austria appear most exposed given their value-added exports to the US make up more than 1% of their GDP. Ireland would bear the brunt of a US decision to extend tariffs to pharmaceuticals given the total value-added exports to the US account for around 8% of its GDP; Denmark is also exposed at around 2% of GDP.
The credit effects for companies will be more material. Risk varies with their exposure to the US market, such as how sensitive US demand is to higher prices, the complexity and length of their supply chains, profit margins and how easily a company can move production or mitigate the impact. Some companies will also need to compete on price with Chinese goods likely to be rerouted from the US to the rest of the world.
European automakers and parts suppliers – a quarter of their value-added exports go to the US – and chemical producers – 18% of theirs – appear most vulnerable, especially as they were already dealing with many challenges before the tariffs were introduced. A US decision to lift temporary exemptions on Canada and Mexico would be particularly damaging to European auto manufacturers given many have production facilities there. Increased competition from China is the main threat for chemical producers. The effects will be mitigated by the fact that many have some manufacturing presence in the US. They should also be able to pass on some of the cost of tariffs to customers depending on the elasticity of product prices.
In addition, the US is a key market for some luxury retailers Moody’s Investor Service rates. There are also high risks for certain spirits like Scotch whisky, cognac and tequila, as well as national beers that depend on specific origins, and products that need ingredients from outside the US, such as cocoa or coffee.
Companies in other sectors are also likely to be indirectly affected through weakened economic activity and financial market volatility. Tariff uncertainty has already undermined confidence globally, impeding business planning, stalling investment and hitting consumer confidence. Given Europe’s already weak growth prospects for 2025, these conditions and slower global growth increase the risk of a recession.
Weaker economic activity will help keep a lid on inflation and allow the European Central Bank to keep monetary policy loose as a result. But this is unlikely to translate into looser credit conditions. Bond spreads have widened materially in response to the US tariff announcements and heightened policy uncertainty, especially at the lower end of the rating scale. This will mainly affect low-rated issuers which need to refinance in the coming years.
The EU’s policy response will determine the full effects on economies and sectors. The EU said it will attempt to negotiate over the coming weeks after the tariff announcements, but will also be prepared to retaliate against US services imports, including digital services. As a last resort, the EU may use the Anti-Coercion Instrument, which allows it to impose tariffs, quotas and other restrictions on goods, services, intellectual property and foreign investments.
Given the increasingly difficult relationship between the EU and the US, which is also evident in the US’ growing disengagement from European security, trading relations between the two regions are likely to deteriorate. This could lead to an EU-US trade war, which would hit consumers and supply chains harder.
Laura Perez Martinez is Associate Managing Director in Credit Strategy and Ruosha Li is Vice President and Senior Analyst in Credit Strategy and Guidance at Moody’s Investor Service.
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