European Auto Stocks Drop as Trump Threatens Tariffs on Key Trade Partners

Shares of European automakers, including Volkswagen, Stellantis, Valeo, and BMW, experienced significant declines after U.S. President-elect Donald Trump proposed sweeping tariffs targeting China, Mexico, and Canada. The threat of a 25% tariff on imports from Mexico and Canada, and a 10% tariff on Chinese goods, rattled investors, causing concerns about the impact on European businesses reliant on the U.S. market.

Volkswagen’s stock dropped by 2.26%, falling to €80.40, while Stellantis saw a 4.54% decrease, dropping to €12.24. Valeo and BMW also faced similar losses, with Valeo falling 2.54% and BMW decreasing by 1.36%. Investors are worried about the ripple effects of these tariffs on the European automotive sector, which could lead to higher manufacturing costs, disruptions in trade, and reduced demand for European-made products.

Economic Impact: European Exports to the U.S. at Risk
According to the European Commission, the EU exported €502.3 billion worth of goods to the U.S. in 2023, with machinery and vehicles comprising the largest share of exports. Automotive and chemicals industries are particularly vulnerable to the proposed tariffs, which could make European products more expensive in the U.S. market.

Tariffs, especially a 10% tariff on U.S. imports, could cause a significant disruption to the flow of trade, potentially damaging the European economy. Analysts, including those from ABN Amro, warn that such tariffs would likely lead to a collapse in exports to the U.S. and cause substantial economic losses, particularly for trade-oriented economies like Germany and the Netherlands.

Potential GDP Decline and Economic Slowdown in Europe
Economic analysts, such as Dirk Schumacher from Natixis, estimate that a 10% tariff could result in a 0.5% decline in GDP for Germany, 0.3% for France, 0.4% for Italy, and 0.2% for Spain. These losses could add up to a €260 billion reduction in Europe’s economic output based on the projected 2024 GDP of €17.4 trillion.

The European Central Bank (ECB) could be forced to respond to the economic slowdown by cutting interest rates further, potentially pushing them toward zero. In contrast, the U.S. Federal Reserve is expected to continue raising rates, leading to a monetary policy divergence between the two regions. This could make the euro weaker, which may help some exporters but also increase import costs, aggravating the economic challenges.

Long-Term Economic Risks: Recession and Trade Conflicts
The long-term effects of these tariffs could be devastating for European economies, potentially pushing the eurozone into a recession. The uncertainty surrounding trade relationships, particularly with the U.S., could exacerbate tensions and lead to a prolonged trade war, further disrupting global supply chains and trade flows.

The weaker euro resulting from tariff-induced economic slowdown may offer a slight advantage for European exporters by making their products cheaper for foreign buyers. However, this could be offset by higher import costs, which would hurt industries reliant on raw materials and components from outside the EU.