The World’s Largest Trade and Investment Relationship Hangs in the Balance

Commentary by Max BergmannandOtto Svendsen

Published September 26, 2024

This commentary is part of a report from the CSIS Geopolitics and Foreign Policy Department entitled The Global Impact of the 2024 U.S. Presidential Election. The report features a set of essays assessing the meaning of the election for Europe, Russia, Eurasia, the Indo-Pacific, the Americas, Africa, and the Middle East.

The U.S.-EU economic relationship is one of the most important in the world. Yet the U.S.-EU diplomatic relationship, despite its economic significance, has historically lacked depth and has often been quite strained. A sea change during the Biden administration, however, has seen an unprecedented strengthening of U.S.-EU relations driven by the growing focus on economic security, the need to coordinate policy on China, and the war in Ukraine.

The transatlantic economic relationship is critical to both Washington and Brussels. The two economies have the largest bilateral trade and investment relationship in the world. The United States is the European Union's largest trade partner, accounting for a fifth of EU exports in 2023, and remains its largest investment destination, accounting for 55 percent of total investment into the United States. In fact, investments between the two blocs far outweigh their respective investments in other regions. For example, total U.S. investment in the European Union is four times greater than in Asia and the Pacific, while EU foreign direct investment in the United States is about 10 times greater than EU investment in India and China combined. Furthermore, the United States has become a critical supplier of energy to propel the EU economy, especially with regard to imports of liquefied natural gas (LNG), which now account for 50 percent of Europe's supplies following Russia's invasion of Ukraine.

After securing a second mandate as president of the European Commission, Ursula von der Leyen's pitch to EU member states indicates she is preparing Brussels for a new era characterized by greater protectionism globally and weaponized economic dependencies. The political guidelines for the 2024-29 European Commission list economic security as the first pillar of the economic foreign policy agenda, ahead of trade and partnerships. Striving to expand free trade will no longer be the primary objective, which represents a significant shift from both the mandate of her previous tenure and the bloc's historic trade policy goals. The commission has already beefed up its trade defense arsenal-for example, through the creation of an anticoercion tool to allow retaliation against countries engaging in economic blackmail against EU member states. Empowered by a surprisingly comfortable reelection vote, von der Leyen will likely put her new powers to use in pushing back against any perceived U.S. coercive trade measures by a Trump administration.

Trump Administration

A second Trump administration would likely provoke a U.S.-EU trade war. The former president has made it clear that tariffs will be a central part of his America First trade policy agenda. In a recent conversation with Elon Musk on X, the former president hinted that he may again target Brussels' free trade agenda if he returns to the White House: "I know the European Union very well. They take great advantage of the United States in trade, as you know." Trump's proposal to impose a universal baseline tariff of 10 percent on all U.S. imports thus represents a major risk for the EU economy. The tariffs Trump implemented in 2018 on European steel (25 percent) and aluminum (10 percent), paused by the Biden administration until the end of March 2025, would likely be put back in place. President Trump also made numerous threats to impose tariffs on car imports from the European Union-a politically sensitive industry to Germany in particular. Trump's former top trade official, Robert Lighthizer, is a candidate for several senior roles in a second Trump administration and is poised to pursue an even more disruptive set of policies. Existing trade conflicts, maintained at a simmer by the Biden administration (including the Airbus-Boeing subsidy dispute, the steel and aluminum tariffs, and European digital taxes), could also be leveraged to exert concessions from Brussels.

The economic stakes of the election for the European Union are thus quite significant. The European Union will respond to Trump's tariffs with tariffs of its own, just as it did during his first term when the European Union imposed tariffs on Harley-Davidson and American whiskey. A U.S.-EU trade war could spiral and would inevitably have inflationary effects on both sides of the Atlantic at a time when price increases are finally slowing down. The European Union's ability to inflict significant economic pain on the U.S. economy could also help deter Trump from escalating a trade war.

Brussels will not be unprepared. The European Commission has already set up a dedicated team of officials to prepare for policy changes after the U.S. elections, especially aggressive tariffs and the United States pulling out of NATO during a second Trump administration. In the fall, the group will increase its engagement with EU governments and share insights on potential EU vulnerabilities and how to mitigate identified risks. One of the group's priorities is developing communication plans in response to major shifts in U.S. policy toward Europe, such as asking EU taxpayers to carry a heavier burden in funding Ukraine's defense, as well as Europe's.

There will also be collision on climate. Trump's hostility to the Paris accords and the Inflation Reduction Act (IRA) will likely cause outrage in Europe and give rise to significant anti-American sentiment, especially among a young generation of Europeans deeply committed to climate action. However, European companies would benefit should Trump scrap subsidies in the IRA, which benefit U.S. producers over European ones.

While the European Union will seek to forge a united position toward the United States, a second Trump administration would likely use its influence with certain EU countries to block a strong EU response. Ultimately, hostility in U.S.-EU relations will undermine efforts to develop a common transatlantic economic position toward China.

Harris Administration

In contrast, a Harris administration would likely strengthen U.S.-EU relations and avoid the trade spats a second Trump administration might rekindle. Harris's administration, like the Biden administration, would not want past trade issues to affect the U.S.-EU relationship. Therefore, issues like the Boeing-Airbus dispute and Trump's steel and aluminum tariffs will either remain on pause or there will be an earnest effort to resolve them. An effort to continue, in some form, the U.S.-EU Trade and Technology Council is likely, as it has delivered a few high-profile deliverables and enabled behind-the-scenes relationship building between key officials. There could be room for greater cooperation on renewable energy technology and trade, critical supply chains, and technology regulation. A Harris administration would also likely strengthen cooperation with the European Union on China and economic security issues.

Recommendations for the Next U.S. Administration

Regardless of who takes the White House in January 2025, the next U.S. administration should shore up the most critical economic relationship underpinning the U.S.-led global order. A trade war between the United States and the European Union would only hurt both sides and likely benefit China. Instead, the United States and the European Union should build on the progress of the Trade and Technology Council and significantly strengthen cooperation on economic security, the green economy, Ukraine reconstruction, sanctions policy, and Chinese subsidies and discriminatory trade policies.

Max Bergmann is the director of the Europe, Russia, and Eurasia Program and the Stuart Center in Euro-Atlantic and Northern European Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Otto Svendsen is a research associate with the CSIS Europe, Russia, and Eurasia Program.

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