Analysis-For Europe, 30% US tariff would hammer trade, force export model rethink

By Philip Blenkinsop and Francesco Canepa

BRUSSELS (Reuters) -The 30% tariff on European goods threatened by U.S. President Donald Trump would, if implemented, be a game-changer for Europe, wiping out whole chunks of transatlantic commerce and forcing a rethink of its export-led economic model.

European ministers meeting in Brussels on Monday remained convinced they can bring Trump back from the brink before his Aug. 1 deadline and reach a deal that would keep the $1.7 trillion two-way trading relationship broadly intact.

But the wild swings in Trump's mood towards the European Union - which he has sometimes labelled as friendly and at other times accused of being set up specifically to destroy the United States - keep the 30% threat very much alive for now.

"It will be almost impossible to continue the trading as we are used to in a transatlantic relationship," EU trade chief Maros Sefcovic said of the 30% rate before meeting ministers and officials of the 27 EU capitals to give them an update.

"Practically it prohibits the trade."

EU officials had been hoping they could limit the damage by agreeing a baseline tariff around 10% - the one currently in place - with additional carve-outs for key sectors like autos.

Last year the United States accounted for a fifth of all EU exports - its largest partner. Trump's bugbear is the $235 billion U.S. deficit generated by the goods component of that trade, even though the U.S. earns a surplus on services.

UPEND POLICY PLANS

The impact of making European exports - from pharmaceuticals to autos, machinery or wine - too expensive to be viable for American consumers would be instantly tangible.

Economists at Barclays estimate an average tariff rate on EU goods of 35% including both reciprocal and sectoral duties combined with a 10% retaliation from Brussels would shave 0.7 percentage points off euro zone output.

This would eat up most of the euro zone's already meagre growth and likely lead the European Central Bank to cut its 2% deposit rate further.

"Inflation would likely undershoot the 2% target more deeply, and for longer, prompting a more accommodative monetary policy stance – with the deposit rate potentially reaching 1% by (March 2026)," the Barclays economists said.    

An earlier estimate by German economic institute IW found tariffs of 20% to 50% would cost Germany's 4.3 trillion euro economy more than 200 billion euros between now and 2028.

While arguably small in percentage terms, that lost activity could still upend Chancellor Friedrich Merz's plans to push through tax cuts and spend more on renewing the country's long neglected infrastructure.

"We would have to postpone large parts of our economic policy efforts because it would interfere with everything and hit the German export industry to the core," Merz said at the weekend of a 30% rate.

NOWHERE TO RUN

Further down the line, it raises bigger questions over how Europe recoups the lost activity to generate the tax revenues and jobs needed to fund ambitions ranging from caring for ageing populations to military rearmament.

Under its existing policy of trade diversification, the EU has done well in striking preliminary deals with new partners but - as the continued delay over completion of the giant EU-Mercosur trade pact shows - it has struggled to get them fully signed and sealed.

"The EU does not have different markets to pull up to and sell into," Varg Folkman, policy analyst at the European Policy Centre think tank said of the long and complex timelines involved in classic free trade deals.

Some observers have argued the stand-off with Trump is what the EU needs to complete long-delayed reforms of its single market, boosting domestic demand and rebalancing its economy away from the exports which account for around half of output.

The International Monetary Fund has estimated the EU's own internal barriers to the free flow of activity are the equivalent of tariffs of 44% for goods and 110% for services. Mooted reforms such as creating freer cross-border capital markets have made little headway in more than a decade.

"It is easier said than done. There isn't an agreement to deepen. The barriers are imposed by the EU members themselves to benefit their own," Folkman said of the web of national regulations.

How all this plays into the EU's negotiating strategy in the less than three weeks ahead remains to be seen - but for now, the bloc has stuck to its line of being open to talks while readying retaliatory measures if they break down.

One thing that might persuade Trump to reach a deal, some European observers suggest, is that the lingering uncertainty may by itself push back the timing of the Federal Reserve interest rate cut the U.S. president so desires.

"The latest developments on the trade war suggest that it will take more time to get a sense of the 'landing zone' on tariffs...which of course raises uncertainty for everyone, including the Fed," AXA chief economist Gilles Moec said. 

"With this new salvo...calls for cutting quickly get even harder to justify."

(Additional reporting by Christoph Steitz in Berlin; Writing by Mark John; Editing by Hugh Lawson)