European Exports at Risk: How Trump's Tariffs Could Hit Key Sectors and European Markets

As global trade tensions escalate, the U.S. is set to impose tariffs on European goods, potentially triggering far-reaching effects on key sectors.

European investors should brace for the fallout from rising tariffs, as President Trump’s threat to target the EU follows his aggressive moves against Canada, Mexico, and China. Market volatility, economic slowdown, and sector-specific challenges are now inevitable, and investors need to adapt accordingly.

The Risk of U.S. Tariffs on the EU

The ongoing trade war between the U.S. and several key global players has entered a new phase, with President Trump signaling that European goods will soon be subject to tariffs. This is no longer a negotiation tactic but a looming reality. For months, investors hoped for last-minute deals, but with escalating tensions and Europe’s commitment to retaliation, the risk of sustained trade disruptions has intensified.

The primary sectors most exposed to the upcoming tariffs include automotive, luxury goods, industrials, and agriculture. These industries, deeply integrated with U.S. demand, could see profits hit hard. European stocks have already felt the impact, with declines across major markets. The euro has also weakened, signaling a shift in investor sentiment as the U.S. dollar strengthens.

Sectors Most at Risk

1. Automotive: The Most Vulnerable European car manufacturers, including BMW, Volkswagen, and Porsche, are among the hardest hit by a proposed 25% tariff on auto imports. With billions of euros in exports to the U.S. at stake, a tariff hike would make European cars more expensive, eroding profit margins. Analysts estimate that a 25% tariff could reduce profits for key manufacturers by as much as 5%.
2. Luxury Goods: High-End Brands Under Pressure Europe’s luxury goods sector, led by companies like LVMH, Hermès, and Burberry, also faces significant risks. These brands rely heavily on U.S. consumers, and price hikes due to tariffs could prompt U.S. customers to cut back on spending. Any decrease in U.S. demand would adversely affect revenue growth for these iconic European names.
3. Industrials & Manufacturing: Supply Chain Disruptions Companies such as Siemens, Schneider Electric, and Airbus, which depend on cross-border supply chains, are already grappling with increased costs and potential delays. New tariffs would exacerbate these challenges, increasing production expenses and slowing delivery schedules.
4. Agriculture & Food: A Growing Target The EU’s agricultural sector, including French wine, Italian cheese, and Spanish olive oil, stands to suffer major losses. The U.S. has long been a top destination for European food and beverages, but tariffs could dampen demand and lead to price increases, hurting European exporters.

Market Volatility and Economic Slowdown

The broader European market is already reacting to the news of impending tariffs. Stocks in the affected sectors have seen significant declines, and the Eurozone economy is showing signs of strain. If tariffs are implemented, analysts predict that European earnings could fall by 1-2% on average, with the potential for larger declines in export-heavy industries like automotive.

This economic slowdown could lead to inflationary pressures, though the overall impact is still unclear. If tariffs continue, it may also drive European Central Bank policymakers to cut interest rates, potentially lowering borrowing costs but highlighting the seriousness of the economic downturn.

What Should Investors Do?

1. Diversify and Reduce U.S.-Exposed Holdings Investors should re-evaluate their portfolios, particularly those heavily invested in sectors most vulnerable to tariffs, such as automotive, industrials, and luxury goods. Shifting to more domestically focused stocks, such as utilities or financials, could help mitigate risks associated with the trade war.
2. Monitor the Euro and Inflation The weakening euro could provide a cushion for exporters but raises costs for European consumers, especially for imported goods. Keep a close watch on the European Central Bank’s responses to tariff-induced slowdowns and the potential for inflation.
3. Look for Value Amid Volatility Despite the uncertainty, there may be long-term opportunities. Some high-quality European companies with strong brands, pricing power, and low U.S. exposure may be undervalued due to overreaction in the markets. For those with a long-term horizon, this could be the right time to identify attractive stocks at discounted prices.

Will the EU Enter a Recwine bession?

A prolonged trade war could drive Europe into a recession. Germany, as the largest European economy with significant export reliance, would likely feel the most pressure. As tariffs weigh on corporate profits and consumer spending, European governments might be forced to introduce fiscal stimulus measures, but the road to recovery could be long and difficult.

Source: Saxo Bank