Europe’s Industrial Future Beyond Tariffs
The rules-based international trade system that is largely shaped by transatlantic cooperation now faces one of its most serious tests. Under President Trump, the U.S. has adopted a more protectionist stance, imposing 50% tariffs on steel, aluminium, and automobiles, along with a 10% tariff on all EU exports to the U.S., which could rise to 50% if no agreement is reached by July 9. This is a departure from the bipartisan consensus established after World War II that free trade benefits all parties.
Figure 1. Net trade in goods and services as a % of GDP
While around half of EU exports are directed to the internal market, the EU still recorded a trade surplus of around €197 billion with the United States in 2024. The U.S. stands out as the EU’s most important trading partner with the American market representing around 8% of total EU exports (see Figure 2). Germany, Ireland, Italy, and Austria lead the pack as top exporters to the U.S., selling large volumes of cars, pharmaceuticals, electrical machinery, and other industrial goods.
Figure 2. Main trading partners of EU countries
As many member states are deeply enmeshed in intra-European supply chains, their dependence on American demand could have a stronger knock-on effect within the EU. This is especially true in Central and Eastern Europe (CEE) where countries are tightly integrated into Germany’s automotive supply chain, through the production of electrical machinery, electronics, and mechanical components. Germany, the EU’s export powerhouse, is their main customer – and also heavily dependent on U.S. demand for vehicles. A potential tariff-induced disruption in Germany’s car exports could ripple across CEE, threatening their industrial base.
The tariff threat has forced the EU to reassess its approach to trade and economic security, with a renewed focus on reindustrialisation, competitiveness, and strategic autonomy.
If there is no Transatlantic trade deal by July 9, the EU will need to introduce a measured response that will avoid hurting its own economy and will minimise collateral damage. One option already on the table is a set of proposed counter-tariffs on €22 billion worth of U.S. goods. They will specifically target sectors like iron, steel, and certain agricultural products, where U.S. imports make up just 1–2% of the EU's total supply. The aim is to signal resolve and improve EU’s negotiating position. However, it may be wiser to implement two broader alternative strategies:
- Friend and nearshoring trade ties and supply chains though diversification, and
- Boosting the internal demand of the EU’s single market.
Adopting such strategies would require prioritising the ratification of pending trade deals. The agreements with Canada (CETA) and Mercosur, as well as the extension of the EU-Mexico trade deal, offer immediate opportunities to deepen ties with the Americas, and may serve as potential workarounds for US tariffs. China, with its vast consumer base, might also seem like a logical alternative. Yet, increasing European companies’ exposure to the Chinese market further would undermine the EU’s broader economic security agenda, emphasising the need to "de-risk" the economic relationship with China. In addition, if the US imposes higher tariffs on China and beyond, this could have further nationalistic knock-on effects, leaving the EU vulnerable.
The EU could replace some of the trade with the U.S. by using fiscal instruments to boost domestic consumption. There has been a long-term policy in some of the biggest EU member-states, most notably Germany, to maintain large fiscal and trade surpluses by keeping wages relatively low and putting a check on government spending. Average annual wages in Germany are roughly $14,400 lower than in the U.S., making German exports more competitive than U.S. domestic production. Lower household incomes mean, however, that EU economies will struggle to replace the lost U.S. demand.
Figure 3. Private final consumption expenditure at current prices per capita (1000 PPS)
The EU has enough collective fiscal power to boost the internal market but will need to create a centralised fiscal authority or investment vehicle, funded by joint borrowing. Though unlikely to become a reality soon, such an instrument could make a difference for Europe’s reindustrialisation by supporting cutting-edge, low-carbon technologies where the EU still has a comparative advantage. This includes targeted support through instruments like the Strategic Technologies for Europe Platform (STEP). Other economic security policies could include coordinated public investment, green public procurement, and cross-border infrastructure development.
Beyond short-term trade measures and fiscal stimulus, the European Commission has prioritized removing internal market barriers and streamlining regulation, yet implementation remains uneven. The completion of the energy, digital and capital unions will lower prices and transaction costs while expanding economic opportunities. In addition, EU members should strengthen international industrial partnerships rather than defaulting to reshoring.
Cleantech and supply chain alliances with trusted partners can reduce dependencies on China while preserving the benefits of trade. In the face of rising global protectionism, strategic investment in the green economy offers the EU a pathway to both economic resilience and long-term competitiveness. The Commission’s plans for a new Competitiveness Fund aimed at boosting Europe’s industrial strength in critical sectors, including deep tech and energy, as well as defence can help alleviate the negative fallout from the process of decoupling from Russia and derisking from China.
CEE countries can play an important role in strengthening low-carbon supply chains. They can leverage their comparative advantage in producing key materials and components critical to Europe’s green transition. Bulgaria, for example, is a major supplier of copper, aluminium, zinc, nickel, and a wide range of electrical and mechanical equipment – from wires and control boards to insulation systems, engines, and agricultural machinery. These products are not only in high demand but are central to decarbonising Europe’s economy.
To help seize these emerging opportunities, CSD and partners from Romania and Estonia are embarking on the development of country-specific roadmaps for strong, export-led green growth in Bulgaria, Estonia, and Romania, while contributing to the timely achievement of the EU climate objectives. The goal will be to help governments redirect economies toward climate-friendly growth trajectories, emphasising cutting-edge, low-carbon products and new export markets. In times of increasing geoeconomic rivalry, building strong green supply chains and reinforcing domestic production capacity is crucial for bolstering EU’s economic resilience and strategic autonomy.
