Managing the Transatlantic Trade and Investment Relationship

For the foreseeable future, the main check on further deterioration will come not from Europe but from US domestic institutions, political shifts, and voter backlash against the costs of economic populism.

The second Trump administration has severely disrupted the economic relationship between the United States and the European Union. In less than a year, we have gone from a status quo of very low tariffs and effectively free movement of capital to the highest tariffs in decades and creeping restrictions on investment flows.

In a sense, this disruption should not have come as a surprise: President Trump has long been an outspoken opponent of free trade and a strong believer in zero-sum economics more generally. What threw off many analysts, commentators, and foreign counterparts is that those beliefs have shaped US international economic policy this year to a much greater extent than during Trump’s first term.

In 2018 and 2019, the first Trump administration raised tariffs on Chinese exports from around 3% to 20%, overwhelmingly through actions justified in Section 301 of the Trade Act of 1974. Section 301 authorizes the administration to respond to unfair trade practices based on an investigation by the US Trade Representative. Many observers interpreted these actions as strategic moves in a geopolitical conflict rather than old-school protectionism.

Strong evidence against an interpretation of these actions as reflecting a geopolitical grand strategy came from the so-called phase one agreement reached by China and the US in early 2020, which was almost entirely focused on economic issues and most saliently included a commitment by China to purchase more American goods. That is not what decoupling looks like, but it is what someone who believes in mercantilism would see as a major accomplishment.

Whatever one thought about those China tariffs, Trump’s trade decisions early in his second term made clear immediately that the new protectionism would not remain limited to imports from China. On his first day back in office, he announced 25% additional tariffs on imports from Canada and Mexico. Canada and Mexico are not just America’s closest neighbors and countries America maintains (or maintained) close and friendly relations with; they have been party to a free-trade agreement with the US for over three decades. Less than a week later, Trump threatened to impose a 25% tariff on Colombian imports unless Colombia accepted deportation flights on military planes.

Despite these clear indications of a sweeping protectionist agenda, the EU remained committed to the idea that it could reach an agreement on a mutual lowering of trade barriers. I suspect that a choir of advisers committed to a certain kind of conventional wisdom convinced the European Commission and other policymakers that, because Trump likes to present himself as a master dealmaker, he understands the gains that can flow from voluntary exchange. There is no evidence for that and a lot of evidence that runs in the opposite direction: if there has ever been a politician whose view of the world is zero-sum, it is Trump. But we all seek meaning in the world, and that he believes “trade is bad” is perhaps not a satisfactory explanation for all the turmoil we have seen.

Then, in early April, Trump announced sweeping, universal tariffs with a minimum rate of 10% and higher rates on imports from countries that run a large surplus in goods with the US. In the case of the EU, the relevant rate was 20%, though the so-called reciprocal tariffs were suspended on the day they were supposed to come into effect. In late August, the EU and the US reached a framework agreement under which the US would instead impose a 15% unilateral tariff. Some industries will be subject to zero or lower tariffs, while steel and aluminum remain subject to higher, 50% national security tariffs.

The new trade arrangement is dramatically more unbalanced than European policymakers expected at the start of the year. And that is before accounting for concessions the EU and its member states have made outside the trade sphere. These concessions include the European commitment to procure $750 billion of energy resources from the US in the next four years, an “expectation” that European companies will invest an additional $600 billion in the US during the same period, and a planned increase in European spending on defense and related functions.

Would a more aggressive posture, along the lines of how Canada and China have responded to America’s new protectionism and perhaps in coordination with Japan and South Korea as well, have led to a preferable outcome? We will never know.

What kept Europe from adopting such a posture, setting aside its incorrect understanding of Trump’s intentions, was the explicit link the Trump administration has established between previously largely unconnected policy areas. As long as the EU needs the US to remain committed to NATO and at least somewhat supportive of Ukraine, it cannot risk antagonizing Trump too much. This dependence has now made it impossible to resist a dramatic transformation of the transatlantic relationship.

Europe’s dependence on America’s security guarantee does not bode well for its willingness and ability to resist opposition in other areas of economic policy, whether it is regulation of the digital economy or carbon tariffs.

Instead, for the foreseeable future—the next two, three, perhaps even seven years—what will continue to matter most are domestic constraints on US policy. While those have weakened to a point that ought to concern America’s allies, they have not disappeared. For example, the Supreme Court recently heard oral arguments in Learning Resources v. Trump, a case that might lead to the dismantling of much of the administration’s new tariff structure. Earlier this year, the Republican Congress ultimately decided against imposing a set of new taxes that would have targeted investors from countries with tax codes the US does not approve of. Democrats may take control of at least one chamber of Congress a year from now. And President Trump’s popularity has diminished significantly over the past year, even when it comes to what had previously been his electoral strength in economic policy.

As voters and elected officials continue to slowly discover the downsides of economic populism, protectionism, and nativism, one can harbor some hope that the damage inflicted on the EU-US trade and investment relationship will be contained.

Photo Credit: White House Flickr. President Donald Trump signs an Executive Order on the Administration’s tariff plans at a “Make America Wealthy Again” event, Wednesday, April 2, 2025, in the White House Rose Garden. (Official White House Photo by Daniel Torok) See also File:2025-April-02-Reciprocal tariffs (left half).jpg