Politics

Trump's tariffs on China are a 'harbinger' for Europe, here's why

Key Points
  • President Trump threatened in early 2018 to impose duties of 20% on European cars.
  • Since then, he has met the president of the European Commission and both decided to seek an agreement over trade and avoid tariffs.
  • Nearly a year since their meeting, both sides of the Atlantic have yet to start those official trade talks.
WASHINGTON, DC - JULY 25: (AFP OUT) U.S. President Donald Trump (R) meets with President of the European Commission Jean-Claude Juncker, in the Oval Office at the White House July 25, 2018 in Washington, DC.
Pool | Getty Images News | Getty Images

The latest U.S. tariffs on China could be a sign of what's to come for Europe, analysts have told CNBC.

President Donald Trump announced Sunday that the current tariffs of 10% on $200 billion of Chinese goods will increase to 25% on Friday. In a Twitter post, he also threatened to impose an extra 25% levies on an additional $325 billion of Chinese goods "shortly".

His decision sparked a sell-off in global equity markets and created further jitters in Europe whose exports could also face similar U.S. tariffs.

"It is a harbinger of what is likely to come for Europe," Fredrik Erixon, head of the European Centre for International Political Economy (ECIPE), told CNBC via email.

"Trump may be an economic illiterate, but he means what he says, and the message that has been coming for quite a while is that European auto producers will be hit with higher tariffs as well," Erixon added.

President Trump threatened in early 2018 to impose duties of 20% on European cars. Since then, he has met the president of the European Commission, the EU's executive body, and both decided to seek an agreement over trade and avoid tariffs. Nearly a year since their meeting, both sides of the Atlantic have yet to start those official trade talks.

On Monday, European auto stocks fell more than 3%.

"On the one hand, this (tariff announcement on China) just confirms what we already know, which is that President Trump is willing to publically escalate conflicts to achieve policy objectives. So, we may also see volatility in the settling of European trade negotiations," Mark Haefele, chief investment officer at UBS Global Wealth Management, told CNBC via email.

VIDEO4:1804:18
China trade tensions flare as President Trump threatens new tariffs

The 28 European countries have agreed on a common position to negotiate a trade deal with the U.S. However, the White House and the European Commission have yet to announce a date for when they will have the first round of talks.

"The latest Trump statement shows that also in the negotiations with the EU, the EU should be prepared to face maximum pressure from the U.S. until the very last minute. Expect the threat of tariffs on European automotive stocks emerge again very quickly," Carsten Brzeski, economist at ING, told CNBC via email.

Uri Dadush, a Washington-based scholar for the think tank Bruegel, also said the EU will face a very complicated situation.

"No-one wants to negotiate with a knife at their throat or be faced with last minute surprises. For the EU, an assembly of proud democracies with varied interests, it is likely to be even more difficult than for the Chinese, who have a single party state and are led by a pragmatist," he said.

The need for a strong US economy

"On the other hand, what has also not changed is that President Trump will continue to need a strong U.S. economy as we move towards the U.S. election—that should make the administration increasingly interested in finding a way forward that supports economic growth and the markets," Haefele also said.

The U.S. economy grew at a rate of 3.2% in the first quarter of this year. This is after registering growing 2.2% in the previous quarter.

Data released last Friday also showed the United States economy added 263,000 jobs in April and the unemployment rate fell to 3.6%, a near 50-year low.

In the meantime, higher tariffs on Chinese goods could have an impact on the U.S. as well the European economies. This is because analysts are expecting China to retaliate.

"New tariffs on Chinese goods coming to the U.S. would be bad also for the EU. Tariff hikes lower the temperature of the world economy, and that means falling demand also for EU goods. Since China is likely to retaliate, the effect will also be stronger than what would happen if it was only the U.S. that raised their tariffs," Erixon told CNBC.