Trump’s Tariff Threats: How Bad Could This Get for Europe?

Key points:

• European exports and key sectors are at risk – If Trump imposes tariffs, automotive, luxury goods, industrials, and agriculture will be the hardest hit.
• Market volatility and economic slowdown are likely – European stocks have already declined, the euro has weakened, and a prolonged trade war could shrink Eurozone economic growth.
• Investors should stay diversified and watch for opportunities – Domestic-focused stocks, defensive sectors, and high-quality companies could provide stability.

The warnings have been there for months, but now it seems inevitable: Trump’s tariffs on European goods are coming. After imposing steep levies on Canada, Mexico, and China, Trump has set his sights on the EU, calling the trade balance an “atrocity” and vowing that tariffs “will definitely happen”.

For many investors, the hope was that this would be just another round of tough talk, with a last-minute deal preventing serious damage. But with tensions escalating and European leaders vowing to “respond firmly”, the risk of full-blown trade disruptions is growing.

The situation is still evolving, but here’s what we know so far – how it might affect European markets, when the fallout could be felt, and what long-term investors should do about it.

Are the Tariffs Really Happening?

All signs point to yes. Trump has a long history of using extreme tariff threats as a negotiating tactic, but markets are reacting as if this time is different. In previous trade wars (such as with China in 2018), tariffs were initially seen as bargaining chips, only for them to be imposed anyway, hurting both sides before a deal was eventually reached. That same playbook could be unfolding here – except now, Europe may be even less willing to back down, given growing geopolitical tensions and a shift toward economic self-reliance.

For investors, the key takeaway is clear: prepare for volatility and possible long-term disruptions.

What’s Happened So Far?

• Markets have already reacted. European stocks fell broadly after Trump’s latest announcement, with automakers leading the decline.
• The euro weakened. Investors fled toward the U.S. dollar, sending the euro down, making imports into the Eurozone more expensive.
• EU leaders have promised to retaliate. If Trump goes ahead with tariffs, Europe is likely to hit back with its own trade restrictions, escalating tensions further.

Which Sectors in Europe Are Most at Risk?

Automotive – The Most Exposed
European car manufacturers export billions of euros’ worth of vehicles to the U.S. each year. A 25% tariff on European auto imports, as Trump has suggested, would make these vehicles significantly more expensive for American buyers. Analysts estimate that a 25% tariff on autos could reduce profits for some manufacturers by 5% or more.

BMW, Volkswagen, and Porsche all rely on the U.S. for a substantial share of sales, and their stock prices reflect that risk. French automaker Renault and Stellantis (which owns Peugeot and Fiat) also have significant U.S. exposure and could see slower sales growth.

Luxury Goods – High-End Brands Could Suffer
Europe is home to some of the world’s most prestigious luxury brands, including LVMH, Hermès, and Burberry. Many of these companies derive a significant share of revenue from American consumers. If tariffs drive up prices, U.S. customers may cut back on spending, impacting revenue growth. Investors in luxury stocks should closely monitor U.S. sales data in the coming months.

Industrials & Manufacturing – Supply Chain Uncertainty
Companies like Siemens, Schneider Electric, and Airbus could see rising costs and delayed contracts. With supply chains already strained from previous disruptions, any new trade barriers will only add to the challenges.

Agriculture & Food – A Likely Trade War Target
The EU exports significant amounts of food and drink products to the U.S., including French wine, Italian cheese, and Spanish olive oil. If tariffs are imposed, these products could face declining demand, impacting companies in the sector.

European Markets Could See More Volatility

Markets hate uncertainty, and tariffs introduce plenty of it. Broad Stoxx 600 Index dropped notably just on the news, and further declines are possible if the situation worsens. Analysts estimate that a 10% tariff on European goods could cut earnings per share (EPS) for European exporters by 1-2%, up to 5% or more for companies like Volkswagen and BMW.

The European Central Bank Could Be Forced to Respond

If tariffs drag down economic growth, central banks may be forced to cut interest rates sooner than expected. That could provide relief for some businesses but would also indicate growing concerns about a slowdown.

And What Happens If This Goes On for Months?

Could Inflation Rise? Yes, but probably not by much. If businesses pass on the cost of tariffs to consumers, inflation in Europe could increase. However, some analysts argue that the overall economic slowdown caused by tariffs could counteract inflationary pressures, keeping prices in check.

Could This Tip Europe Into a Recession? Possibly, if tariffs stay in place long enough. A full-blown trade war could shrink Eurozone economic growth with Germany being the hardest hit due to its reliance on exports. The automotive, industrial, and luxury sectors would bear the brunt of the downturn, while domestically focused businesses might be more resilient.

If tariffs remain in place for long, some European companies might be forced cut investment, scale back hiring, or even lay off workers, putting pressure on consumer spending.

What Should European Investors Do?

Check Your Exposure to U.S. Trade
If your portfolio includes European stocks that rely heavily on exports to the U.S., consider rebalancing to reduce exposure to trade-sensitive industries. Auto stocks, industrials, and luxury brands are most at risk. Domestic-focused sectors (utilities, telecoms, and European financials) may be more insulated.

Stay Diversified
One of the best defenses against trade uncertainty is diversification. If your portfolio is over-concentrated in export-heavy industries, now might be a good time to add exposure to domestic stocks or defensive sectors. Holding international investments outside of Europe can also help cushion against regional risks.

Watch the Euro and Inflation Trends
A weaker euro helps exporters but hurts consumers by making imported goods more expensive. Investors should keep an eye on The European Central Bank’s response – if tariffs threaten economic growth, rate cuts could follow. Higher tariffs might also increase inflation and push up prices, affecting consumer spending and company margins.

Look for Buying Opportunities
If markets overreact to trade fears, some high-quality European stocks may become attractively priced. Investors with a long-term perspective could find good opportunities in companies with strong brands and pricing power, minimal reliance on U.S. sales and resilient business models that can withstand economic shocks.

So Where Does This Leave Us?

The tariffs come at a time when Europe’s economy is already struggling with slow growth. The longer this drags on, the more likely we are to see pressure on corporate profits, consumer spending, and overall investor confidence. 

For investors, the key takeaway is clear: Don’t panic – but don’t ignore the risks either. Stay diversified, focus on long-term fundamentals and prepare for volatility.