The United States threatens to impose a 50% tariff on the European Union. How great are the economic risks facing Europe?

According to the Zhitong Finance APP, U.S. President Donald Trump has threatened to impose a 50% tariff on goods imported from the European Union, which will take effect on June 1. HSBC previously estimated that a 10% tariff would reduce the Eurozone's GDP by 0.3%, so these higher tariffs could have a greater impact. A simple linear extrapolation of this estimate (not an exact calibration) suggests that a 50% tariff would mean a 1.5% loss in Eurozone GDP. The countries that may be most affected are those that export more goods to the U.S., such as Germany and Italy among the four major economies. It remains to be seen how U.S.-EU trade negotiations will be affected, but more uncertainty is detrimental to economic growth and may prompt the European Central Bank to further cut interest rates.

President Trump announced on "Truth Social" that negotiations have made no progress and complained about "strong trade barriers, value-added taxes, ridiculous corporate penalties, non-tariff trade barriers, currency manipulation, unfair and unreasonable lawsuits against U.S. companies, and so on."

Prior to this development, it was reported that U.S.-EU trade negotiations had made little progress for weeks. The EU had previously proposed measures including "zero tariffs" on transatlantic goods trade and increased purchases of various goods from the U.S., including energy. However, the U.S. instead demanded unilateral concessions from the EU, including tariff quotas and reductions in non-tariff barriers (Politico, May 23).

HSBC pointed out that if Trump's proposed 50% tariff threat is implemented, the economic impact on Europe could be very significant.

The bank's core forecast assumption is that the U.S. will impose a 10% tariff on EU imports, while the EU's retaliatory measures will be limited. Through the combined effects of trade headwinds and uncertainty, HSBC's forecast includes a 0.3% drag on Eurozone GDP related to tariffs (Table 1). HSBC also believes that this impact has a disinflationary effect, but will only lead to the European Central Bank further cutting rates to 2.00% in June to a limited extent, after which it will pause rate cuts.

A simple linear extrapolation of this estimate (not an exact calibration) suggests that a 50% tariff would mean a 1.5% loss in Eurozone GDP. The countries that may be most affected are those that export more goods to the U.S. — Germany and Italy among the four major economies (Figure 2). Industries particularly vulnerable to impact include the automotive and pharmaceutical sectors (Figure 3, although the latter is currently excluded from reciprocal tariffs in the U.S.).

There are many uncertainties regarding this potential economic impact, including the extent of retaliatory measures that the European Union may take, which could lead to inflation.

In fact, the European Commission has proposed imposing counter-tariffs on U.S. imports worth €95 billion, including alcoholic beverages, fish, aircraft, automobiles, and machinery (Reuters, May 8). However, member states have not yet reached an agreement on these measures — in fact, the EU has not even fully retaliated against the €26 billion tariffs on steel and aluminum — making it potentially difficult to reach any agreement on additional measures targeting a 50% tariff. If retaliatory measures are limited, the economic impact could be greater, increasing the risk that the European Central Bank will lower interest rates below the "neutral" range of 1.75-2.00%.

Ultimately, whether this tariff threat will actually take effect or become a catalyst for advancing negotiations remains to be seen.

On one hand, President Trump's social media posts contain grievances that the EU is highly unlikely to resolve — such as value-added tax. On the other hand, such high tariffs would lead to significant market volatility and ultimately have a stagflation effect on the U.S. (these issues previously led the U.S. to reduce the increase in tariffs).

In any case, this serves as a wake-up call for anyone who believes that the trade backdrop is calming or becoming more predictable. As for the European Central Bank, more uncertainty — as President Christine Lagarde commented earlier that trade will never be the same as before — along with the potential deflationary impact of U.S. tariff increases, may prompt the council to further cut interest rates, bringing rates into a supportive range