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What does the new 50% steel & aluminium tariff mean for Europe?

Macro economyEurozone

Today, the US is doubling its import tariff on steel and aluminium from 25% to 50%. Announcing this at a steel mill in Pennsylvania last Friday, President Trump indicated he wanted to make tariffs so high that US businesses would have no alternative but to buy from American suppliers. To quote the president, “[If] It's at 25% - they can get over that fence. At 50%, they can no longer get over the fence." The UK has a partial carve-out thanks to its trade deal with the US, and faces a lower 25% tariff. But the EU – still in negotiations with the US – faces the higher 50% tariff.

Will the new tariffs even stick, or will we get another TACO?

Before we go into the likely impact, it’s reasonable to wonder whether the new higher tariff rate on these specific goods will even stick. While helpful to the US steel industry, the higher tariff will likely cause turmoil among downstream producers that heavily rely on steel and aluminium as inputs. It will take time for the US metals industry to respond to increased domestic demand, and in the meantime there are likely to be shortages and/or much higher costs. It would not surprise us therefore if we see another example of Trump Always Chickens Out, or TACO as it has come to be known in financial markets, whereby corporate lobbying ultimately leads to a reprieve or widespread exemptions to the new tariffs.

The scope is wider than previous steel & aluminium tariffs…

Note that the previous round of steel & aluminium tariffs in Trump’s first presidency only affected metals exports, but not their derivative products that have high metals content. This time it’s different, and derived products are also included - from construction materials like pipes, screws and bolts, to some consumer goods ranging from skis to electronics. For the latter, it is important to note that only the metal component of the product is subject to the higher tariff, with the rest subject to the lower baseline tariff of 10%. Taking steel and aluminium by themselves, around EUR9.5bn in EU exports to the US are affected by the 50% tariff – or 1.8% of total EU exports to the US. Derivatives products add approximately another EUR18.5bn to the mix, making for a total of 5.3% of the EU’s exports to the US that are fully or partially affected. With the US making up around 20% of total EU exports, this means around 1% of total EU exports are fully or partially impacted by the new tariffs.

…but the growth impact on the EU should still be small

Consistent with Trump’s expectation, the 50% tariff on steel and aluminium is so prohibitive that it is likely to drive exports of those products down to near-zero. That is unlikely to be the case for derivative products, however, particularly those with relatively low metals content. It is also likely that when customs declarations are made, businesses will declare the metal value as low as possible to avoid the goods being subject to higher tariffs, or find other ways to mitigate the impact. All told, we think the higher tariff rate will be enough to knock around 0.5% off of total EU exports. This includes a collapse in metals exports and a smaller decline in derivative goods exports. By itself, this would knock around 0.1pp off of growth in Q2 and Q3, which is small enough to keep us within reasonable bounds of our base case for a sharp slowdown in growth over the next couple of quarters on the back of US tariffs, but not something that tips the eurozone into a downturn. As outlined in our latest Global Monthly, we expect the eurozone to grow at a tepid 0.1% q/q in Q2 and Q3, only picking up to 0.2% in Q4. This is well below trend, and comes despite the ongoing improvement in domestic demand.

Net exports of energy-intensive materials to the US look like an aberration

Steel and aluminium production are highly energy-intensive, while the EU only recently emerged from a severe energy crisis, and continues to face much higher energy prices than its key trade partners. Indeed, looking at steel and aluminium exports in the aggregate, the EU has gone from being an occasional net exporter to a major net importer of steel and aluminium since the onset of the energy crisis. Though this is the case at the aggregate level, EU net exports of steel and aluminium to the US have actually increased. This is despite the fact that the US has an abundance of energy – so much so that is now exporting ever increasing amounts of energy to the EU in the form of LNG. Put another way, the US is exporting LNG to the EU so that it can make energy-intensive steel to send back to the US. This is likely a holdover from a past when the US was a net energy importer, while the EU had a secure supply of cheap energy from Russia. With the situation around energy now very different, exports to the US already face significant competitiveness pressures, which the new Trump tariffs (if they stick) are likely to amplify. With that said, there could be new sources of demand over the coming years to fill in the gap left by the US.

Higher defence/infra spending and stronger domestic demand might help plug the gap

By lucky coincidence, domestic demand for steel and aluminium is likely to pick up in the EU just when US demand is falling away. First, the EU is set to significantly raise defence spending over the coming years. We are likely to get more details on the composition and timing of this at the upcoming NATO summit on 24-25 June, but our base case sees eurozone defence spending rising from around 2% of GDP at present to 2.5% by the end of 2026. According to a European Commission paper in March, steel and aluminium are ‘essential’ inputs in the production of defence equipment: “A main battle tank contains 50 to 60 tonnes of high-quality steel; a self-propelled artillery system up to 100 tonnes; a fighter aircraft 3 tonnes of aluminium.” There is clearly, then, an opportunity for the industry to re-orient away from exporting to the US and towards the new growth engine of EU defence. Further sources of demand growth are likely to come from higher German infrastructure spending, and more broadly in Europe, from higher construction and domestic goods demand on the back of falling interest rates. The hit to growth from lower exports to the US therefore could well prove to be short-lived.