WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

image credit: istock.com/PromesaArtStudio

By Robert Stehrer and Bernhard Dachs (AIT)

Following the major tariff hikes announced by Donald Trump last week, countries are seeking various ways to cope with the situation, which is approaching an almost de facto closure of the US as an export market. Some countries have already announced their own tariff hikes. For example, China announced it would raise tariffs to 34% (i.e. the same rate the US recently imposed on China on top of the 20% Trump had imposed earlier). In response, the US increased tariffs on Chinese imports by another 50%, thereby putting the tariff rate above the 100% level and making the most dramatic move yet in this dizzying round of tariff escalations. On top of that, China also announced that it would devalue the renminbi, its currency.

As an initial retaliatory step, the European Commission has proposed counter-tariffs of 25% on a range of products imported from the US – including diamonds, eggs, sausages and poultry – as a response to the tariff hikes on aluminium and steel. The total value of these tariffs should not exceed EUR 26 billion (for details, see here). Further steps as a response to the US tariff increases announce on 2 April have yet to be decided. While the debates continue, the EU is offering to bilaterally lift all tariffs on industrial goods in order to bring Trump to the negotiating table.

The importance, scale and depth of EU-US relations

This potential tariff escalation, along with the proposals from both sides, should be viewed from a broader perspective, especially given that both the EU and the US face similar competition from China. With a share of around 26% of global GDP, the US remains the world’s largest economy. The EU ranks third, with around 16% of global GDP, while China holds the second place with a share of 18%. Together, the US and EU account for more than 40% of global GDP.

The EU and the United States also have the world’s largest bilateral trade relationship. EU-US trade in goods and services exceeded EUR 1 trillion in 2022, accounting for about 5% of all global trade flows. On the other hand, China-US trade and China-EU trade account for 3.6% and 4.5%, respectively (Table 1).

However, the bilateral relationship between the EU and the US extends beyond trade. Take, for example, their close cooperation in science and technology. While 12% of all scientific publications from the EU and the US are joint publications, only 7% are joint publications between China and the US, and only 5% are joint research between China and the EU. There is also a considerable number of patents for innovations jointly developed by individuals from the EU and the US, far more than those between the US and China or the EU and China.

The EU and the US are also major investment partners. EU and US firms have EUR 5.3 trillion worth of foreign direct investment (FDI) in each other’s markets (2022 data).[1] The EU and the US also account for nearly half of global spending on research and development (R&D).[2]

Table 1 / Bilateral relations between the EU, the US and China in 2022

An EU-US free-trade zone for manufactured goods?

There are many reasons for the EU and the US to maintain their cooperation, especially as both face fierce competition from China. EU relations with China, which is seen as a partner for cooperation but also an economic competitor and a systemic rival, is becoming more and more complex. The suggestion by the European Commission to mutually set tariffs between the EU and the US on manufactured products to zero – however not touching other EU product standards and regulations which are heavily attacked by the US administration – would be economically beneficial for both sides of the Atlantic.

In Figure 1, which is based on our wiiw trade model, we present how the announced new US tariffs (as of 07/04/2025[3]) and the implications of zero tariffs on manufactured goods, as suggested by the European Commission, would impact real wages in the EU and its 27 individual member states. In the first scenario (US tariff hikes with tariffs added to the existing ones), real wages in the EU would drop by 0.1%. However, when bilaterally setting tariffs on manufactured goods to zero, real wages in the EU would increase by 0.13% and the real wage loss for the US would be reduced from -0.55% to -0.33%.

Figure 1 / Real wage effects in the EU and the US of the recently announced US tariff hikes versus EU-US agreement on zero tariffs for manufactured goods  

However, it is highly unlikely that such a ‘deal’ would be acceptable to the US, as it would not automatically help Donald Trump to achieve the economic and political goals he has been championing – irrespective of their validity and economic implications for both the US and the world.

Conclusions

The EU and the US are deeply integrated economically in many areas beyond trade – such as joint patenting and innovation, FDI and R&D – and these bilateral relations are more significant for both countries than their respective ties with China. Given these facts, further cooperation would be mutually beneficial and could serve as a common strategy to counter competition from China, which both view as a systemic rival. A zero-tariff agreement on manufactured goods, as proposed by the EU, would benefit both sides and help to offset the negative effects of the US’s other tariff hikes. Such an agreement would also foster continued economic integration and, most importantly, reinforce the longstanding political alliance between the US and Europe, which is increasingly at risk. Unfortunately, given recent developments in the US politics, such a development seems to become more and more unlikely.

Footnotes:

[1] https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/united-states_en

[2] https://research-and-innovation.ec.europa.eu/strategy/strategy-research-and-innovation/europe-world/international-cooperation/bilateral-cooperation-science-and-technology-agreements-non-eu-countries/united-states_en#:~:text=The%20EU%20and%20the%20US,in%20science%2C%20technology%20and%20innovation.

[3] The more recent escalation of US tariffs on Chinese imports to 104% is not yet included.