European Union: Bracing for U.S. Tariffs

We consider it likely that the Trump administration will apply tariffs on imports from the European Union (EU). This has implications for specific industry sectors and even possibly over time sovereign credit ratings, especially for countries with economic dependency on these industries. This follows the administration's latest announcement of 25% tariffs to be imposed on all steel and aluminum imports and previous announcements of bilateral tariffs on China, Canada, and Mexico across a wider range of goods. However, the policy objectives the U.S. will ultimately pursue through tariffs on EU goods imports are unclear.

President Trump has frequently raised concerns over EU defense spending, transatlantic trade imbalances, member states' climate and energy policies, and EU regulation. The EU has already increased security spending in the wake of Russia's invasion of Ukraine, and we are still likely to see significant cooperation on international security between the United States and Europe. The EU could also facilitate the purchase of more U.S. products, including defense and energy. However, we consider it unlikely that EU member states will make meaningful changes to climate and tax policy at the request of the Trump administration, nor will macroeconomic policy within the EU be adjusted to reduce a trade imbalance. If the U.S. imposes tariffs on the EU, whether for these or for other reasons, European leaders have announced that Europe will retaliate with tariffs on U.S. exports.

-- U.S. tariffs on the EU will likely be announced soon, and trade tensions are likely to persist.
-- U.S. tariffs would negatively affect EU growth, made worse by EU retaliation.
-- A prolonged trade war between the EU and U.S. could weaken sovereign credit quality in some countries.

"U.S. tariffs applied to the EU would have an adverse effect on EU growth prospects, and if the disruption is severe and prolonged, the fallout could adversely affect some sovereign credit ratings in Europe," said Jason Graffam, Senior Vice President, Global Sovereign and Financial Institution Ratings. "That said, a U.S.-EU trade war could ultimately result in greater support and integration at the EU level, though this would likely take time to implement."