Donald Trump’s partial tariff ‘pause’ does not change the overall picture: The US president has launched a wrecking ball into the global trade order. Yet while the shock is collective, the impact is not. The EU’s 27 economies, while governed by the same trade policy, have significantly different exposures to the US market.
To maintain unity in what could become a prolonged trade conflict, the EU should use the rest of the 90-day pause not just to prepare countermeasures, but to design a fair way to share the burden.
The US accounts for 20% of all EU exports, worth €530 billion or roughly 3% of the EU’s GDP, but this is unevenly spread. US-bound exports account for 12.5% of Ireland’s GDP and 3.4% of Slovakia’s, but only 0.53% for Luxembourg and 0.16% for Cyprus. Further complicating the picture, certain sectors that are politically sensitive – and therefore vulnerable to additional tariffs – are geographically concentrated.
This has political consequences. Before the blanket US tariffs announced in April, Trump had imposed measures on steel and aluminium. The EU planned to retaliate against a range of US goods including whiskey; but when Trump threatened to retaliate with 200% tariffs on European wine and spirits, the EU backed off under pressure from France and Italy, the leading exporters.
And during crisis meetings in early April following the blanket tariffs, EU trade ministers expressed differing views on the severity of the threat and the appropriate response. There is a risk that Trump can divide the bloc through bilateral meetings with national leaders, overriding a coordinated EU approach.
The underlying institutional setup amplifies this political dimension. While trade policy is centralised, the EU lacks a common fiscal instrument to support those hardest hit. So far, economic responses have been national, with Spain announcing a €14 billion umbrella against the impact of tariffs. But, as the economic costs of an unfolding trade war rise, not all countries will be able to afford such measures.
Relying on uncoordinated national responses risks distorting the level playing field of the Single Market. It also increases the likelihood that governments unable to shield their industries will prioritise national sensitivities over a coordinated EU response. It is no coincidence that Italy, with limited fiscal space and concentrated export exposure, has been among the more reluctant voices when it comes to responding forcefully.
Spreading the impact of tariffs
A European burden-sharing mechanism compensating those most affected by trade disruptions would bolster the EU’s unity and strengthen Brussels’ hand in talks with Washington. Doing so would, however, come with its own complexities: design, financing and moral hazard.
There is precedent for such a mechanism. The economic impact of Brexit was unevenly distributed, with Ireland and the fishing sector among the hardest hit. The EU responded with the Brexit Adjustment Reserve (BAR), a €5 billion fund designed to support those regions and sectors most affected.
Today, however, the EU faces significantly higher costs, which it must confront with a largely inflexible budget. Spain has floated the idea of using the proceeds from possible EU counter-tariffs to finance such an instrument. While politically appealing and intuitively sensible, this faces structural barriers. Customs duties flow into the EU budget but do not create additional spending capacity. Instead, any unexpected revenue simply reduces member states’ national contributions.
In the immediate term, the EU could deploy the limited resources still available — including funding under the Flexibility Instrument, the Globalisation Adjustment Fund, and any remaining budgetary margins — to offer initial support to sensitive, disproportionately affected sectors. Additional flexibility could come from allowing member states to tap into the crisis reserve within the Common Agricultural Policy and using the mid-term review of cohesion policy to allow for targeted support.
Creative solutions needed for tariff turbulence
Still, the scale of the challenge far exceeds what these limited EU resources can deliver. To respond effectively and equitably, the EU will need to be more creative. Fortunately, there are some avenues it can explore.
EU state aid rules could be adapted to enable targeted national support without undermining fair competition. Similarly, the EU may apply regulatory flexibility – for example, by easing sector-specific rules – to relieve pressure on exposed industries.
The EU could also design its countermeasures to offset the specific harms caused by US trade policy, by identifying the sectors most affected and imposing measures to benefit them. This will be complex, and must be underpinned by rigorous analytics. Expanding the recently announced ‘import surveillance task force’ to systematically track the impact of trade disruptions could help.
These measures, however, come with an important caveat: moral hazard. If countries and industries are effectively bought out of their trade concerns, there is a strong incentive to exaggerate losses, or worse, to attach a price tag to their support for common EU positions. The EU will thus have to tread a fine line between targeted compensation and opening a Pandora’s box of demands.
A transatlantic trade spat will put the EU to the test, both politically and economically. A well-measured dose of practical solidarity would help to weather the storm.
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