US-EU trade war: What happens if negotiations fail?
By Oluwatobi Ojabello
Trade wars rarely yield clear winners. Instead, both sides endure economic losses, with the extent of damage shaped by their vulnerabilities, resilience, and strategic leverage.
With the April 12 negotiations looming, the risk of failure raises the stakes for both the U.S. and the EU. If talks collapse, economic consequences will follow, potentially triggering a cycle of retaliatory measures.
History has shown how quickly trade disputes can escalate. In 2002, U.S. steel tariffs prompted swift EU retaliation, ultimately forcing Washington to reverse course.
This time, however, the stakes are higher. The dispute extends beyond steel, with key industries automobiles, Big Tech, and energy caught in the crossfire. Both sides now face heightened risks, making the path to resolution even more uncertain.
Who has more to lose?
In 2024, the U.S. held a €109 billion trade surplus with the EU, primarily in services such as technology, finance, and intellectual property. However, its goods sector showed a €157 billion deficit, a weakness Brussels is eager to exploit.
The EU has already retaliated with €26 billion in tariffs on U.S. goods and signals further action. Particularly vulnerable are Big Tech firms like Google, Amazon, and Starlink, facing intensified European regulatory scrutiny.
Meanwhile, the U.S. escalated tensions by imposing a 25 percent tariff on European cars effective April 2, with another 25 percent tariff on auto parts set for May.
This hits a critical EU export: 750,000 vehicles worth €38.5 billion were shipped to the U.S. in 2024. European automakers, already struggling with declining demand in China, now face new market barriers.
Eu’s retaliation strategy: a delicate balance
The EU has tools to strike back, including suspending U.S. firms’ intellectual property rights or barring them from public contracts.
Italy, for instance, is reconsidering its reliance on Starlink, reflecting European concerns over dependence on American technology.
An EU diplomat warned, “The Americans think they have the upper hand, but we can escalate too.” However, deploying countermeasures isn’t straightforward.
Retaliatory tariffs would likely harm European businesses more than U.S. firms, given the EU’s higher dependency on exports.
Complicating matters is Europe’s reliance on U.S. liquefied natural gas (LNG) post-Ukraine war. Any disruption to LNG supply would have severe economic repercussions, making trade retaliation a high-stakes gamble.
Internal divisions and political constraints
EU members remain divided on retaliation. France prioritizes protecting its alcohol industry notably bourbon whiskey, while Germany focuses on shielding its automotive sector.
The EU’s slow response to past U.S. tariffs on steel and aluminum, which took years to finalize, underscores coordination challenges. One EU diplomat admitted, “We have to respond. It’s the only way to get a deal.”
Yet internal disputes could delay decisive action, weakening Europe’s negotiating stance.
What happens if talks break down?
A failed deal might initially favor the U.S. Its large domestic market and service-sector strength could provide short-term resilience. However, prolonged tariffs would erode consumer confidence, raise costs, and pressure American businesses, particularly in agriculture, which is already facing EU retaliatory tariffs.
Europe, meanwhile, would see immediate damage in manufacturing and autos. But over time, Brussels could use regulatory power to pressure U.S. firms.
Companies like Google, Amazon, and Facebook, already facing heightened scrutiny, could encounter stricter compliance hurdles, increasing costs and limiting market access.
Mark Humphrey, associate partner at UNSW, warned, “This trade war will cause significant suffering. Everyone, whether American or not, will be affected. It impacts any country that exports heavily to the U.S. and faces high tariffs on American goods.”
China might also capitalize on the rift, positioning itself as a more attractive trade partner. As Humphrey noted, “China could step in and pick up trade that might have otherwise gone to the U.S.”
Global implications of a failed deal
A prolonged U.S.-EU trade war would disrupt global supply chains, fuel inflation, and create market instability.
Historically, such conflicts have had far-reaching consequences the Smoot-Hawley tariffs of the 1930s deepened the Great Depression, and Trump’s 2018 tariffs on China led to global economic uncertainty.
If the U.S. and EU fail to reach an agreement, both economies will suffer. The U.S. may gain short-term advantages due to its service-sector dominance, but extended conflict will strain industries, consumers, and businesses.
Meanwhile, the EU’s manufacturing sector, already under pressure, could face deeper economic challenges.
The true cost of failure may not be immediate, but its impact on global trade and economic relations could last for years.
