U.S. President Donald Trump chalked up early victories with his aggressive tariffs as Mexico, Canada, Colombia, and Panama opted to strike deals rather than escalate trade tensions, easing investor concerns about a global trade war, but Macquarie warns that investors are paying too little attention to the prospect of Trump dropping a “tariff bomb” in the EU in the coming weeks that will likely trigger an in-kind response that leaves the euro at risk.
“We worry that traders are paying too little attention to the prospect that there will be a ‘tariff bomb’ dropped on Europe in coming weeks,” strategists from Macquarie said in a note on Thursday. “Indeed, the US-EU dispute could manifest across several interrelated domains, shaped by divergences in approaches in a variety of public policies.”
A U.S. ‘tariff bomb’ will likely find fertile ground in the EU, the strategists said, unresolved issues could rapidly escalate into trade tensions as Europe is “target-rich.”
Unlike Mexico, Canada, and Panama, who all appeared keen to reach an agreement to avoid confrontation with the U.S., the EU is likely to hit back.
The potential flashpoints are numerous and complex, Macquarie added. spanning “subsidy competition in the energy transition economy, agricultural market access, digital governance, tech regulation, carbon border measures, energy security, approaches to China, NATO defense spending, and pharmaceutical patent enforcement.”
The EUR/USD is likely to feel the tariff pain immediately, Macquarie said, flagging the potential for significant market disruption.
Trump has held back on hitting the EU with tariffs because “the lack of a stable government in Germany and France is what may have held Trump back from threatening
specific tariffs on the EU, for now,” Macquarie said.
Despite the near-term risks, the strategists believe a negotiated compromise will eventually settle many outstanding U.S.-EU issues, likely centered around increased European defense spending and commitments to purchase U.S. energy products.
“Resolutions and solutions are likely to take shape around higher EU defense spending and commitments to buy US energy products, and invest in the US’s energy infrastructure,” they added.
