European Leaders Assess How Trump will affect the EU

Expect a Rocky Relations between the US and EU

Following Donald Trump’s victory in the U.S. presidential elections, Europe is bracing for a new era of economic protectionism that could have significant consequences on its economy, geopolitical stability, and efforts to combat climate change. Trump’s proposed tariffs, potential reduction in U.S. support for NATO and Ukraine, and opposition to climate initiatives like the Inflation Reduction Act may profoundly affect Europe’s economic landscape and its integration into global trade systems.

Key Points

• Economic Protectionism: Trump’s tariffs (10%-20%) could directly impact European exports (steel, vehicles, cheese, wine) and indirectly harm European companies through U.S. sanctions on Chinese technology.
• Geopolitical Implications: A shift in U.S. foreign policy may reduce support for Ukraine and pressure NATO, leading to increased defense spending in Europe.
• Inflation and Climate Concerns: The Inflation Reduction Act poses challenges for Europe by incentivizing investments in the U.S., while Trump’s stance against climate change initiatives could hinder Europe’s low-carbon transition.
• Future of Globalization: The potential return of protectionist policies may lead to a fragmented global trading system, with the emergence of separate trading blocs.
• Technology and Regulation: The divergence in approaches to technology regulation between the US and Europe could widen under a Trump presidency. European efforts to impose stricter regulations on data privacy and tech giants may face resistance from a US administration that prioritizes deregulation, leading to increased tensions in transatlantic tech relations,

A re-elected Trump may insist on increased defense spending from European allies, further straining NATO’s unity. This could lead some countries to question their commitments to collective security, potentially resulting in a fragmented response to external threats such as Russian aggression.

In short, it will take good diplomacy on the EU to mitigate this risk. That might or might not be enough. What matters more is who Trump appoints to lead key roles in his admistration. If positions such as the National Security Advisor, CIA head, etc. are from the conservative wing of the Republican party then I expect the US and EU positions to be closer. If on the other hand, Trump chooses the isolationalists for these key roles, then expect more friction.

Our guess is that Trump does not want to be as a weak leader internationally. Thus, we hope and think he put the conservative wing in positions of national security either at the start or eventually. The isolationalists have a naive view of the world and if Trump listened to them and implemented their policies, we would expect presure from Senators and the media. This in turn would result in Trump to reevaluate things and move to the more conservative approach.

On the tariff and economic policies of Trump. Our view is that he will use this as a negotiating tool with EU and other allies. Thus, he will probably extract some benefits for the US otherwise we end up in a tit-for-tat trade war between allies.

Leaders in countries such as Italy, Sweden and Hungary could play a leading role in calming things down on the trade and economic front. Therefore, expect an important role to be played by Meloni from Italy and Swedish politicians for example.

What is likely to appease Trump is a closer alignment on economic policy against China since Trump and the US see this as the biggest threat. Thus, europe could get more support from Trump on defense spending since this will be offset with closer policies on China.

In short, the anticipated trade conflicts could lead to increased prices for consumers in Europe as tariffs drive up import costs. European businesses that rely heavily on exports to the U.S. may experience reduced competitiveness, prompting them to rethink their supply chains and market strategies. Sectors such as automotive and technology, which have significant ties to the U.S. market, could be particularly vulnerable, necessitating a reevaluation of their operations to mitigate risks. This could be done by moving some of their production to the US instead of exporting there from EU plants.

Our conclusion is that if Trump staffs key roles in his administrative with people that understand the geopolitic risks, then more cooperation with the EU will result. This could happen initially or at a later date. Thus, the best policy for the EU would be to take a medium or long-term view in managing this relationship. However, we also see the chance of potential negative consequences as show next.

Potential Negative Consequences of Trump’s Second Term

1. NATO’s Unity at Stake: A second term for Trump could challenge the existing unity within NATO. His previous criticisms of NATO allies for not meeting defense spending targets may resurface, potentially creating rifts among member states. This division could embolden adversaries like Russia, who might perceive NATO’s weakened cohesion as an opportunity to exert influence or aggression in Eastern Europe.
2. Shift in Foreign Aid and Alliances: Trump’s transactional approach to foreign policy might lead to a reassessment of U.S. foreign aid, with a focus on countries that align more closely with American interests rather than longstanding allies. This could alienate traditional partners and reduce the U.S.’s ability to rally support for collective security measures against aggressors.
3. Increased Russian Aggression: With a perceived lack of resolve from the U.S., Russia may become more assertive in its foreign policy, particularly in Ukraine and other neighboring countries. The Kremlin could interpret a Trump presidency as a green light for further expansionist actions, raising the stakes for European security.
4. Impact on Global Alliances: Beyond NATO, Trump’s second term could affect global alliances such as the G7 and G20. His unpredictable nature might prompt other nations to reconsider their relationships with the U.S., leading to a shift in how global issues are addressed and coordinated. Countries might seek to strengthen ties with China or Russia as a counterweight to U.S. unpredictability.
5. Domestic Political Ramifications: The implications of Trump’s foreign policy decisions will likely reverberate domestically, affecting bipartisan support for international agreements and commitments. A polarized political landscape could hinder the U.S.’s ability to respond effectively to emerging global crises, further complicating its foreign relations.
6. Long-term Security Landscape: The long-term repercussions of a Trump presidency could reshape the security landscape in Europe and beyond. As nations adapt to a less predictable U.S., they may pursue independent defense strategies, leading to an era of increased militarization and potential conflicts.