Huatai Securities believes the probability of Trump’s tariff threat being fully implemented (i.e., sustained enforcement) is low. This is due to the current “fragility” of U.S. domestic politics and financial markets, which may struggle to absorb these potential impacts—especially considering the renewed volatility in U.S. long-term bond rates, which are critical for government and market stability.
Key Points: On Friday, May 23 (U.S. time), Trump posted on social media suggesting tariffs of up to 50% on the EU starting June 1, once again triggering significant volatility in global financial markets. This article analyzes the background and potential implications of Trump’s “suggestion.” Given the current fragility of U.S. domestic politics and financial markets, particularly the rising volatility in long-term bond rates, we assess the likelihood of this “threat” being fully realized as low. 1. Market Reaction: Recent tariff discussions have consistently acted as a catalyst for declining U.S. dollar credibility and sell-offs in dollar-denominated assets. Following the announcement, the U.S. experienced simultaneous declines in stocks, bonds, and the dollar, while European equities also adjusted. However, the euro strengthened against the dollar, indicating market perception that the tariff threat poses greater risks to U. S. fundamentals and dollar assets. Specifically, on May 23, the U.S. dollar index fell 0.8%, while the EUR/USD exchange rate rose 0.7%. Meanwhile, both U.S. and European equities declined sharply, with France’s CAC40, Germany’s DAX, and the STOXX600 dropping 1.9%, 1.5%, and 0.9%, respectively, while the S&P 500 fell 0.7%. Additionally, 10-year Eurozone bond yields edged up 1.4 basis points, while 10-year U. S. Treasury yields dipped 2.3 basis points but pared losses post-announcement. The simultaneous decline in U.S. stocks, bonds, and the dollar underscores how tariff volatility exacerbates declining U.S. government credibility and accelerates global de-dollarization (Charts 1 and 2; see “The Origin, Impact, and Aftermath of U.S.-China Tariff De-escalation,” May 13, 2025). 2. Trump’s sudden hardline stance on EU tariffs may reflect a “gaming” strategy—a countermeasure to the EU’s tough trade negotiation posture. Slow progress in U.S.-EU tariff talks and the EU’s preparation of retaliatory measures likely triggered Trump’s threat, which may be more of a tactical move. Recently, U.S. Treasury Secretary Besant noted that the EU faces a “collective action problem,” which has hindered trade negotiations.At the G7 Finance Ministers and Central Bank Governors meeting concluded on May 22, only the US and UK reached a trade agreement. The meeting’s statement did not address tariff issues, indicating that the US failed to reach trade agreements with other G7 members, including key EU nations.
On May 8, the EU launched a public consultation on retaliatory tariffs targeting $107 billion worth of US imports. Given President Trump’s history of using tariff threats as leverage in negotiations with China, Mexico, Canada, and Colombia, the current tariff warnings against the EU may largely be a strategic move. 3. A 50% US tariff on EU goods would create a lose-lose scenario for both economies. As each other’s largest trading partners, such tariffs would severely impact bilateral trade in goods and services, as well as multinational corporations. Our analysis in “Understanding Trump’s Proposed 25% Tariff on the EU” (2025/2/27) showed that in 2024, the US accounted for 14% of EU imports and 21% of exports, with the EU’s trade surplus with the US representing 1. 2% of its GDP. Conversely, the EU accounted for 18% of US imports and 19% of exports, contributing to 20% of the US trade deficit (Charts 3-4). Key EU exports to the US include pharmaceuticals, machinery, automobiles, and electronics, while imports from the US comprise oil, coal, machinery, pharmaceuticals, and optical instruments (Charts 5-6). A 50% tariff, coupled with EU countermeasures, could slash US imports from the EU by over half. The EU’s retaliation may target US aircraft, automobiles, medical devices, agricultural products, and chemicals. Beyond goods trade, on April 10, the EU signaled stricter regulations for US tech and service firms, potentially undermining the US’s significant service trade surplus with the EU (Chart 7). 4. Europe has greater fiscal space to stimulate domestic demand, while rising US Treasury yields will increasingly constrain US tariff policies. This partly explains why US assets face heavier selling pressure. Although both regions may adopt marginal fiscal easing in the short term, concerns over US fiscal sustainability persist. Failure to curb deficits or continued easing could exacerbate asset sell-offs, offsetting stimulus effects through monetary tightening and fueling stock market volatility.As analyzed in our report ‘What Do Reciprocal Tariffs Mean for the Eurozone?’ (2025/4/27), Germany and other EU countries are expected to see marginal fiscal expansion in 2025, moderately boosting growth, which has been positively reflected in European equity markets. On May 22, the US House of Representatives passed the ‘Beautiful Big Act,’ indicating that US fiscal expansion may exceed previous expectations.
However, US markets experienced simultaneous declines in equities, bonds, and the dollar, with 10-year and 30-year Treasury yields once again surpassing 4.5% and 5.0%, respectively (Chart 8; see ‘The House’s Beautiful Big Act and the Deteriorating Outlook for US Treasuries,’ 2025/5/24). This suggests that the marginal effects of US fiscal easing may be mixed—while it could stimulate aggregate demand, it may also tighten financial conditions. From the perspectives of total debt, Treasury premiums, and sustainability, the upward pressure on risk premiums induced by further US fiscal loosening could far exceed that in Europe. If US asset prices further exhibit ‘risk aversion’ to tariffs, the implementation of Trump’s threat to impose 50% tariffs on the EU by June 1 will become even more challenging. Given the short-term shift in the Trump administration’s policy focus toward domestic issues, particularly the imminent passage of the fiscal budget—if tariffs exacerbate the adjustment pressure on US asset prices, the likelihood of Trump following through on his tariff threats against the EU will decline. Currently, the US Congress is focused on the voting schedule for the fiscal budget, and domestic political pressures limit the administration’s capacity to divert significant attention to tariff issues. Otherwise, pressure from Congress and the cabinet would rise, as evidenced by the earlier downgrade of tariffs on China (see ‘The Origins, Impact, and Follow-up of the US-China Tariff De-escalation,’ 2025/5/13). Moreover, if US asset prices continue to adjust by then, the probability of Trump imposing tariffs on Europe by June 1 will further decrease. Despite numerous uncertainties, we believe the US will ultimately struggle to sustain a total tariff rate on the EU significantly above 20%. Considering the tariffs already imposed or likely to be imposed on Europe, the US may find it difficult to further substantially increase tariffs on the EU, with the final tariff level unlikely to exceed 20% by a large margin. In 2024, the US weighted average import tariff on the EU was 1.2%. Including the 10% global tariff imposed on April 9 and the impact of existing or potential tariffs on key goods such as steel, aluminum, automobiles, pharmaceuticals, and semiconductors, the US tariff rate on the EU could rise to 14%-16% (Chart 9).The current trade disputes between the U.S. and Europe primarily revolve around Europe’s value-added tax (VAT), stringent digital regulations, and high food standards. Given the EU’s reluctance to compromise on these issues, the U.S. is likely to impose punitive tariffs on European goods. However, if the U.S. levies a 50% punitive tariff on EU exports, most European products could lose their competitiveness entirely, potentially resulting in effects similar to a U.S.-EU trade embargo.
During the escalation of U.S.-China tariffs, the impact of ‘restrictive’ tariffs on the U.S. has been thoroughly demonstrated (refer to ‘The Origin, Impact, and Aftermath of U.S.-China Tariff Reductions,’ 2025/5/13). If U.S. tariffs on the EU surge to 50%, it would severely disrupt supply chains in U.S. industries such as pharmaceuticals, machinery, and automobiles. Potential retaliatory measures from Europe could also significantly affect the interests of U.S. multinational corporations in sectors like aircraft, automobiles, medical devices, agriculture, and high-tech. Ultimately, the U.S. political system and economic conditions may constrain Trump’s actions. Main Charts Authors: Yi Han, Chang Huili Source: Huatai Ruisi Original Title: ‘Huatai | Macro: How to View Trump’s Threat of 50% Tariffs on the EU?’ Risk Warning and Disclaimer The market carries risks, and investment requires caution. This article does not constitute personal investment advice nor does it consider the specific investment objectives, financial situations, or needs of individual users. Users should evaluate whether any opinions, views, or conclusions in this article align with their particular circumstances. Investments made based on this article are at the investor’s own risk.
