On Feb 10, US President Donald Trump announced 25 percent tariffs on all imports of steel and aluminum originating from outside the United States, thus covering exports from the European Union as well.

With the US being the second-largest export market for EU steel producers, the tariffs will affect EU industries significantly. The European Steel Association fears that the EU could lose up to 3.7 million metric tons of steel exports to the US and that the tariffs will worsen an "already dire market environment".

European Commission President Ursula von der Leyen voiced her deep regret over the US decision to impose tariffs on steel and aluminum. "Tariffs are taxes — bad for business, worse for consumers," she said.

However, since July 2018, the EU has been taking safeguard measures to protect its steel market by utilizing tariff-rate quotas in response to Trump's initial round of tariffs during his first term in office. This means that only a certain volume of imports of steel is tariff-free, and a 25 percent tariff applies once the threshold is exceeded. It is unclear if any retaliatory EU tariffs will stack on top of the existing measures.

But will there be further tariffs on EU imports? Trump has indicated that further tariffs will be imposed on EU products although it is yet to be confirmed what the tariffs will be and on which products.

Trump has called the EU "brutal" in its trade policy, signaling a clear intent.

Amid this uncertainty, the most frequently cited options are the 10 percent universal tariff, which would be extremely damaging for EU economies, and the 100 percent tariff on imported cars, which is expected to affect Germany's automobile exports disproportionately.

In the past, German firms have never faced tariffs on exports of cars into the US and it remains to be seen whether the contracts on offer will still be lucrative. Germany will most likely experience a decrease in its gross domestic product and to a lesser extent it is expected France will be negatively affected too.

However, importing more than exporting is not necessarily bad for an economy. The US president seems particularly frustrated about the large trade imbalance between the EU resulting in the US being a net importer of cars from the EU with approximately 40 billion euros ($41.99 billion) imported into the US versus approximately 10 billion euros exported from the US in 2023.

Bigger picture

Focusing on goods does not seem to provide a complete picture as an economy comprises both goods and services.

When looking at the balance of trade between the countries, the EU buys more services from the US than vice versa. The US is a net "exporter" of services with approximately $170 billion bought into the US versus approximately $240 billion sold from the US in 2023.

The idea that the US trade deficit is a weakness of the US is wrong; it is a sign of its strength because the demand for US dollars is kept strong due to its popularity. Lacking this, the trade deficit could indeed cause pressure on economic growth.

Trump has displayed his lack of understanding of the value-added tax, or VAT, and import VAT regimes, declaring this a further unfair financial trade imposition.

As a consequence of Trump's tariffs, EU countries may look into implementing a digital sales tax, or DST. This is not a value-added tax but a tax on the gross revenue of large companies such as search engines (for example Google), providers of social media services (for example Facebook) and online marketplaces (for example Amazon) based on the location of the users. Or, if DST is already levied, an EU country may broaden the scope and/or increase its tax rate. This may have a significant impact on many US companies with a large customer base in the EU initially — although I would expect the tax would ultimately be passed on to EU consumers.

Thoughtful response

Already having communicated that unjustified tariffs on the EU will not go unanswered, the EU is left with the difficult task of carefully considering its response. It needs to maintain stability in businesses and markets and avoid any significant adverse effects bearing in mind that retaliatory measures such as the imposition of tariffs would have a negative impact on EU consumers, by creating higher prices. It would also be detrimental to competitiveness due to higher prices of imported semifinished products that are destined for export.

Furthermore, any retaliatory measure would need to be designed to comply with the rules of the World Trade Organization. Although it might be tempting for the EU to use the carbon border adjustment mechanism, which taxes CO2 at the border for retaliation, this would not only be unrealistic as the tax would need to increase from 63 euros per ton of CO2 to 240 euros per ton to correspond with the tariffs from EU exports into the US, but would also mean a deviation from CBAM's intended purposes as a climate policy tool.

One controversial idea to scale-up of the dispute could be that the EU and possibly the United Kingdom begin to look at curtailing other "imports" from the US — its music, touring artists, films and media influence. The financial impact of the "soft power" industries may send the message that US isolationist policies can mean exactly that and not just on conventional trade.

The author is a VAT manager at leading audit, tax and business advisory firm Blick Rothenberg in the UK. The views do not necessarily reflect those of China Daily.