EU Blog

Zoltán Gálik | blog | 3/3/2025 |

Tariffs are not beneficial to either the American or the European economy. The US import duties imposed on steel and aluminium products and on vehicles may drastically affect the European – and particularly the German – economy, as Germany is one of the largest exporters of goods and vehicles to overseas markets.

Expected effects on the US side (tariffs on steel and aluminium products)

Protection of domestic industry.
Higher tariffs can protect certain US steel and aluminium producers from the downward price pressure exerted by foreign imports and help them retain their market share and turnover. However, only a very limited number of firms can obtain short-term advantages (in the steel sector: U.S. Steel, Nucor Corporation, Cleveland-Cliffs, Steel Dynamics; in aluminium: Alcoa, Century Aluminum, Kaiser Aluminum). The rise in domestic steel and aluminium prices harms US firms (car manufacturers, machinery producers, construction suppliers) that rely on these materials as inputs. Falling demand and higher production costs can also dampen the longer-term sales of steel and aluminium producers themselves. In other words, the benefits for them also erode quickly. Other firms benefit only to a very limited extent, if at all.

Job preservation or job creation.
If higher tariffs make domestic production more attractive, steel and aluminium producers may employ more workers or at least avoid layoffs.

Strategic industrial interests.
The steel and aluminium industries are of strategic importance, for instance for the defence sector and for infrastructure investment. Tariffs may make the country’s internal production capacity more secure.

Additional revenue for the federal budget.
In 2017 (still before the major tariff increases), the United States recorded customs revenue of around 34–35 billion USD. During 2018–2019, when most of the tariffs on steel, aluminium and certain Chinese imports entered into force, customs revenues rose sharply, reaching nearly 70–80 billion USD in 2019. (Lower and upper estimates differ depending on methodology and period coverage, but the doubling is evident.) In 2020–2021, customs revenues remained at a high level, although there were fluctuations due to the COVID-19 pandemic, the decline in trade and disruptions in supply chains.

Expected disadvantages on the US side

Rising costs in manufacturing.
Tariffs operate as a tax that raises the price of products – that is, the US government substantially increases the tax burden on firms and, indirectly, on consumers. Tariffs increase the costs borne by US importers and consumers. Formally, the tariff is usually paid by the importer into the US Treasury, but it is incorporated into the product price and ultimately paid by consumers and manufacturing firms. US firms using steel and aluminium products (for example carmakers, construction suppliers, machinery manufacturers) have to obtain inputs at higher prices, which may increase the prices of their own products.

Higher consumer prices.
In the end, higher tariffs may appear in higher consumer prices, as producers and retailers pass increased costs on to buyers. This erodes US consumers’ purchasing power and satisfaction.

Deterioration of economic relations and heightened uncertainty.
In the longer term, trade wars and unpredictable tariff measures undermine stable and predictable economic relations, which can deter investors. Affected countries may introduce retaliatory tariffs to protect their own markets, thereby reducing the volume of US exports and indirectly causing forgone profits and loss of market share in other sectors.

Distortion of innovation and quality competition.
In the automotive sector, competition is a key driver of research and development (for instance in electric and hybrid vehicle technologies). Tariff measures artificially reduce competition, which can weaken firms’ incentives to innovate.

Deteriorating competitiveness, the reconfiguration of supply chains and additional administrative burdens can inflict significant, but difficult-to-quantify, losses on economic actors.

Potential negative effects of US tariffs on the European side

From a European perspective, US tariffs may have adverse consequences in four main areas:

• general tariffs on imports from the EU,

• tariffs on steel and aluminium products,

• tariffs on motor vehicles,

• reciprocal tariff measures.

The EU and the US have already fought several “trade wars” over the past quarter century, including:

• the “banana war” (1990–2000),

• the hormone-treated beef dispute (1990–2010),

• tariffs on steel products under George W. Bush (2002–2003),

• the Boeing–Airbus dispute (2004–2021),

• tariffs on steel and aluminium products under Trump’s first presidency (2018).

(For a detailed discussion, see: Gálik, Zoltán and Molnár, Anna, eds. (2019) Regional and Bilateral Relations of the European Union. Nemzeti Közszolgálati Egyetem, Budapest. https://real.mtak.hu/104067/)

Possible scenarios for EU countermeasures

The EU’s potential responses include:

• raising tariffs (for example on US agricultural products such as soybeans, or – as in the past – on Bourbon whiskey), and imposing measures on digital and technology firms,

• seeking remedies through the World Trade Organization (WTO) – as in earlier disputes, where decisions have favoured both the EU and the US at different times,

• supporting EU industry,

• diversifying supply chains and reducing dependence on the United States,

• restricting US investments in strategic sectors,

• limiting US services exports (where the position is the reverse of that in goods trade).

The introduction of a 25% US tariff would be extremely damaging for several sectors of the European economy, and particularly for Germany, as Germany is the EU’s largest exporter and the automotive industry is one of its most important export-oriented sectors. The introduction of tariffs could have multiplier effects: not only would direct exports fall, but the supply of parts and materials could also be disrupted.

Likely effects on the EU and Germany

Decline in exports.
Tariffs would make exports from Europe (especially from Germany) to the US more expensive, reducing the competitiveness of many sectors on the American market. The US is one of the EU’s largest trading partners; high tariffs could weaken European firms’ market positions in the North American region.

Slower economic growth.
The European economy – and the German economy in particular – is highly dependent on exports. A trade war would not only reduce direct export sales, but also disrupt supply chains: in the export of components, semi-finished products, machinery and technology. These shocks could spill over to Hungary very quickly as well.

Retaliatory measures and uncertainty.
Expected EU retaliatory tariffs could further escalate trade conflicts. Investor confidence may decline, and market volatility may increase, inflicting additional damage on long-term economic growth.

Particular exposure of German vehicle exports to the US.
Germany’s export performance depends heavily on foreign markets, especially the US. A 25% tariff would affect German exports more severely, in relative terms, than those of many other EU member states.

Employment and investment.
A fall in exports could affect employment in Germany: the automotive industry and its supplier network provide livelihoods for millions of workers, both directly and indirectly. If sales decline, firms may reduce investment and carry out layoffs.

Relocation of production.
German car manufacturers might shift production to the United States (or to other regions serving the US market) in order to circumvent tariffs. This would reduce production and investment in Germany and in the surrounding EU region, as well as activity in associated supply chains.

Supply chains.
German industry operates with a highly integrated European supplier network. More expensive final products would therefore not only weaken the competitive position of German manufacturers but also negatively affect all European suppliers involved in the production process.

The German automotive industry (and European carmakers more broadly) is particularly dependent on the North American market, especially for premium brands (Mercedes-Benz, BMW, Audi, Porsche). The automotive sector accounts for a significant share of German GDP and provides employment for several hundred thousand people.

Price increases and loss of competitiveness

A 25% tariff would be directly incorporated into the price of European (German) cars sold on the US market.

• Imported vehicles would become significantly more expensive, potentially reducing demand and firms’ profits.

• Local producers operating in the US, as well as vehicles imported from other countries (e.g. Japan, South Korea) that might face lower tariffs, could gain a competitive advantage if they are not subject to the full 25% duty.

Relocation of production

German car manufacturers have already established significant production capacities in the US (for example the BMW plant in South Carolina, Mercedes production in Alabama).

A 25% tariff could encourage firms to assemble more models and larger volumes locally to avoid import duties. This might increase employment in the US but reduce production and investment in Germany and in the EU more broadly.

Technological and R&D expenditure

If profits decline, firms may cut spending on research, development and innovation, which would weaken the technological leadership of the German (and European) automotive industry over the longer term. Under localisation pressure, R&D departments may gradually be relocated to the US or other regions as well.

Supplier integration and parts imports

Many European car manufacturers operate transatlantic parts supply chains: components move back and forth across the Atlantic (for example engines, gearboxes, electronic components). Tariffs can complicate and increase the cost of these flows, further undermining competitiveness.

Some statistical and economic indicators

• The entire German vehicle industry (passenger cars, commercial vehicles and their suppliers) directly accounts for around 4–5% of German GDP; its indirect contribution is even higher through R&D and a wide range of service providers.

• In terms of volume, Germany exports several hundred thousand cars to the US each year. In the pre-COVID years, exports exceeded half a million units, temporarily falling to around 350–400 thousand in 2020, followed by a gradual recovery.

• In value terms, this typically corresponds to 15–20+ billion euros annually, amounting to roughly 10–15% of German automotive exports, which makes the US one of Germany’s largest export markets for vehicles.

• Within German manufacturing exports, the vehicle industry has for years been the most significant sector. The automotive industry and related branches are crucial not only for domestic production but also for employment.

• German firms (e.g. BMW, Mercedes-Benz, Volkswagen) produce vehicles in large volumes locally in the United States as well. Models assembled there are sold partly on the US domestic market and partly exported to other regions. This reduces the visible volume of direct exports from Germany to the US, but sales across the Atlantic remain highly important from the perspective of the parent companies.