Irene Lauro, European Economist at Schroders, notes that although tariffs on EU imports have been suspended for 90 days, countermeasures could still be imposed on the US if a trade deal is not agreed.

The European Union (EU) has suspended its 25% retaliatory tariffs on US goods imports after Donald Trump suspended his tariffs on the trading bloc for 90 days.

The EU had initially retaliated on steel and aluminium tariffs imposed by Trump at the end of March with a 25% tariff on some agricultural goods, motorcycles, and clothing.

And while the EU would prefer to negotiate a trade deal with the US government (there’s clearly a limited appetite for an escalation in the tensions given the importance of trade with the US), European Commission President Ursula von der Leyen has said that if negotiations are not satisfactory then the EU countermeasures will kick in.

Countries like Germany and Ireland are going to see the largest impact on growth if no deal with the US is reached. This is because they are they are the ones that have the largest trade surplus in goods with the US.

The countdown has already started

So, we now have 90 days for the EU and the US to reach a trade agreement. One sticking point could be Trump’s demand that the EU should buy $350 billion worth of fossil fuels.

This is roughly the total amount of energy that the EU imports each year; currently the EU imports about $65 billion worth of fossil fuels from the US. So, clearly Trump’s demand is not something that can be easily satisfied.

What can the EU do?

The EU could buy more fuels, such as LNG, from the US. Germany’s new government has recently announced new stimulus measures, with a specific allocation to bolstering the county’s defence capabilities. This could be used to buy more US-made defence products.

Clearly there is a preference now at the wider pan-European level to buy European-made products, to boost the European defence sector. But at least initially in the short term, over the next couple of years European demand can go towards the US defence sector. This will also give the European defence sector the time to scale up production and be able to meet the huge amount of demand coming from Germany and other European countries.

The EU could also offer to lower the tariffs on US industrial products, for example on the imports of US cars.

Does the EU have a “Trump” card?

The bloc is working on countermeasures to the Trump tariffs and, in particular, is targeting the US’s huge services surplus with the EU. This could be a key bargaining chip as although the EU is a net exporter of goods to the US, it’s also a large importer of US services, and this is where the EU could have some retaliatory leverage.

What impact will this have on inflation and how will the ECB react?

Following the interest rate cut in April, I think the ECB will deliver another rate cut in June as the shock to business confidence, trade and investment has increased the downside risks to activity.

In Europe, we have seen a sharp drop in energy prices and a stronger euro, both of which put downward pressure on inflation. There’s also a risk of increased competition from cheap Chinese imports that could push down the price of goods.

With China now facing tariffs on imports to the US, there’s now the risk that these exports will go to Europe. And so, in my view, Europe now faces downside risks to growth, while disinflationary forces are at play. And that will support the call for lower rates. We do have a positive impulse coming from fiscal policy, especially in Germany, but its impact on activity is not likely to be seen until next year.

What impact will the tariffs have if the EU fails to reach a trade deal?

Clearly the 20% blanket tariffs will have a significant impact on growth over the next 12 months. We consider the impact will cut growth by 0.3% to 0.4%, but this is only considering the direct impact.

We also have to consider the secondary effects, such as on business and consumer confidence. The tariffs are already having an impact on consumer confidence; holding back on consumption and investment looks increasingly likely.