Just as there is a fine line between love and hate, the transition from friendship to rivalry — especially in geopolitics — can happen almost overnight. Just a few months ago, U.S.-EU relations seemed at their best, with both sides aligned on key issues. Now, the narrative has changed dramatically: instead of cooperation, the focus has shifted to widening divisions and rising tensions.
The trigger? Donald Trump's political resurgence, coupled with his tough stance on tariffs. Unlike previous trade disputes, he has made it clear this time: no country, strategic partner or not, will be exempt from his aggressive trade policy. For the EU, this means preparing for 25% tariffs on key exports such as automobiles, semiconductors, and pharmaceuticals.
The European automotive industry alone employs 13.8 million people, so any disruption could have far-reaching economic consequences. Even if automakers try to target other markets, there are significant barriers, such as differences in consumer preferences, regulatory standards, and logistical challenges. In short, making up for losses in the U.S. market will not be easy or quick.
So, while European automakers such as Volkswagen, Stellantis, and BMW may look attractive from a valuation standpoint, geopolitical risks loom. A further escalation of tariffs could cause their share prices to plummet again, especially as competition from Chinese electric vehicle manufacturers intensifies. Investors expecting stability in this sector may be in for a volatile ride.
However, the automotive sector is not the only one at risk. Trump has also set March 12 as the starting date for imposing 25% tariffs on all steel and aluminum imports. Brussels estimates that this could affect European exports worth up to €28 billion ($29.3 billion). Already suffering from an economic slowdown, Germany is likely to be one of the hardest-hit countries.
How will Europe respond?
The EU has two options: diplomacy or retaliation. If a deal involving increased U.S. LNG imports or other trade concessions is not reached, the bloc could invoke the 2023 Regulation against economic coercion. This mechanism allows Europe to impose countermeasures on companies that support U.S. sanctions, and the first in the crosshairs are likely to be tech giants and Tesla.
Is European market growth over?
Even though the STOXX 600 is trading at a 36% discount to the S&P 500 based on a 12-month forward P/E ratio (according to LSEG Datastream), more investors expect a market correction in the next three months. The collapse of trade negotiations with the U.S., rising tariffs, and ongoing uncertainty surrounding the Ukraine conflict could negatively impact investor sentiment.