EU trade push may offset Trump tariff hit, study finds

US tariffs are putting pressure on European exporters, especially manufacturers, but a faster EU push for new trade deals could soften the blow, according to research by Andreas Baur and colleagues. For retail investors watching European industrials, autos, chemicals or broad EU funds, the key issue is whether lost sales to the US can be replaced by lower barriers elsewhere.

Tariffs are taxes on imported goods. They make foreign products more expensive and can reduce demand, which is why exporters often take a hit when a major trading partner raises them. Donald Trump’s tariffs have disrupted trade flows in ways that include a direct drag on EU sales to the US, the world’s largest economy and the EU’s largest export market, according to the analysis.

The EU’s response has been to speed up negotiations with other countries and regions. Officials have grouped seven target deals under the label “P7,” according to the research: Mercosur in Latin America, India, Australia, the United Arab Emirates, Indonesia, Malaysia and Thailand. The EU has recently signed a free trade agreement with Mercosur, according to the analysis.

The P7 currently buy about 10% of EU exports, roughly half the US share, Baur and his colleagues estimate. That gap makes the task look difficult at first. The difference is that EU-US tariffs were already near zero and trade links were already well developed, while many P7 relationships still have higher tariffs and less developed trade ties. In plain English, there may be more room for trade to grow if those barriers fall.

Baur and his colleagues simulated the effect of P7 trade agreements under Trump’s Section 122 tariffs, after a Supreme Court ruling that found IEEPA tariffs illegal, according to the paper. Their model estimates that the current US tariffs could reduce EU annual exports by about 1%.

The pain is not evenly spread. The researchers estimate that EU manufacturing output would fall by about 1.3%, while overall EU gross domestic product, or GDP, would drop by 0.1%. GDP measures the value of goods and services produced in an economy, so a 0.1% decline is modest at the economy-wide level but more meaningful for exposed industries.

What the P7 deals could change

In one scenario, the EU completes P7 agreements that remove tariffs in manufacturing, mining and agriculture, while leaving non-tariff barriers in place. Non-tariff barriers are rules that affect trade without being direct import taxes, such as minimum quality standards. The researchers call this “shallow integration.”

Under that scenario, Baur and his colleagues estimate EU exports would rise 1.3%, even with the US tariff drag still in place. EU manufacturing output would increase by 0.1%, EU GDP would gain 0.2%, and P7 GDP would rise 0.4%, according to the simulation.

A broader deal structure would go further by reducing non-tariff barriers to a minimum, a setup the researchers call “deep integration.” In that case, the model estimates a 0.4% boost to EU GDP and a 1.0% boost to P7 GDP.

The takeaway from the simulation is straightforward: US tariffs may push the EU to build trade links that were previously underused. Baur and his colleagues also estimate that the US would see GDP shrink under the higher-tariff setup, while the EU and P7 economies could gain if the new agreements are completed.

This story draws on original reporting from Klement on Investing.