European companies were wondering whether they had dodged a harmful blow to their US sales after Donald Trump promised to slap trade tariffs on Mexican, Canadian and Chinese goods in social media posts late on Monday.
They could congratulate themselves for avoiding the incoming president’s gaze – so far – and watch as he turned his anger on Beijing and Washington’s nearest trading partners.
Trump was in belligerent mood, just as he was in 2016 when he first used tariffs as a tactic to extract concessions on a string of foreign policy objectives.
In 2016 the tariffs were justified as elements in US national security policy to limit immigration and stymie Chinese attempts to access American government databases. This time, Trump’s tirade against Mexico, Canada and China went a step further, accusing them of being the source of chemicals used by drug traffickers.
He said trade tariffs – which can be imposed by a presidential executive order – were necessary to punish the three governments for aiding criminal gangs, and they would remain in place “until such time as drugs, in particular fentanyl, and all illegal aliens stop this invasion of our country”.
In the first instance, Mexico and Canada would be slapped with a 25% tariff on all imports, Trump declared. China risks a further 10% should it refuse to comply with whatever specific wishes the Trump administration outlines once installed in the White House.
Europe and the UK was expected to be on the list, but to the amazement of many, Trump looked in the first instance north, south and east.
Chris Turner, the head of research for the UK and Europe at ING, said: “That Europe was not mentioned in Trump’s first tariff post could perhaps be welcome news on the continent.
“Yet local policymakers will remain fearful that it will just be a matter of time before Trump turns his attention to the European auto sector or tariffs more broadly.”
He added: “In any case, the threat of further tariffs on China shows the direction of travel on world trade,” which, he said, was for it to slow as everyone raised tariffs in retaliation and the price of exported goods increased.
Shares in European carmakers dropped on Tuesday after Trump’s announcement, with the Vauxhall owner Stellantis down 4.7%, Volkswagen down 2.6% and BMW losing 1.5%.
Drinks company shares also fell, such as Diagio (-1.4%), which produces tequila in Mexico.
Falls in the pound and the euro should be expected even if Trump’s attention remains elsewhere, such is the knock-on effect to trading nations such as the UK and Germany.
Should the UK and Europe also become targets, many commentators have argued that Keir Starmer will face a stark choice; to ally with Trump or join Brussels’s retaliation.
David Henig, the director of the UK trade policy project at the Centre for International Political Economy, said there was a more sophisticated game to be played.
“There’s no doubt that it is in the UK’s economic interests to seek smoother trade with the EU, but ideally, that shouldn’t come at the expense of wider trade to which we remain committed,” he wrote in a blog.
Starmer could negotiate closer ties for goods trade with the EU while continuing to talk to the US about financial regulations, where London has some leverage.
Starmer appeared to take a tougher line with China in talks with leader Xi Jinping at the G20 summit, in a move likely to please Trump, though the exchanges appeared to be for show rather than applying any substantive policy shift.
More broadly, global economic growth could be imperilled by the effect on US companies, which will also be hit by the tariffs, with further knock-on effects to the UK and Europe. The US is the single largest destination for UK and EU exports.
To illustrate how any form of retaliation could hurt the US, Canada, Mexico and China bought more than $1tn (£791bn) of US exports and sold almost $1.5tn of goods and services to the US last year.
ING have calculated that if Trump’s new tariffs are fully passed on, they could cost American consumers up to $2,400 each annually.
Paul Donovan, the chief economist at UBS Wealth Management, said there was little time for US companies to stockpile goods to weather the first months of Trump’s trade war.
And consumers would feel the pain quickly. “The taxes apply at point of import, so an additional 10% tax on goods from China implies consumers pay 4% more (on average) for those goods in stores,” he said.
“Areas like the auto sector, which has highly integrated supply chains across the Mexico-US and Canada-US borders, are very vulnerable,” he added.
Henig said imposing Trump’s new tariffs on all goods from Mexico, Canada and China in one day would “tank” the US economy, because the reliance on imported raw materials and semi-finished goods was large and extra charges would be crippling.
Flavio Volpe, the president of the Automotive Parts Manufacturers’ Association, told the New York Times: “Half of the cars made in Canada are made by American companies, and half of the parts that go into all the cars made in Canada come from US suppliers, and more than half of the raw materials are from US sources.
“We are beyond partners. We are almost as inseparable as family.”
The Canadian prime minister, Justin Trudeau, the finance minister, Chrystia Freeland, and the public safety minister, Dominic LeBlanc, said: “Canada is essential to US domestic energy supply, and last year 60% of US crude oil imports originated in Canada.”
They added: “We will of course continue to discuss these issues with the incoming administration.”
