Low impact: US tariffs on steel and aluminum imports from EU

On Feb. 10, US President Donald Trump announced changes to Section 232 tariffs on steel and aluminum imports beginning March 12. These removed all exemptions and exceptions that were put in place since higher tariffs were first announced in March 2018. Tariffs on aluminum imports were also lifted from 10% to 25% and extends tariffs to steel and aluminum derivative products based on foreign content.

On Feb. 25 and March 1, respectively, President Trump also signed executive orders to launch fresh Section 232 investigations into imports of copper, timber, lumber, and their derivative products. President Trump previously suggested a wider tariff increase on imports from the EU, singling out the automotive sector.

What does this mean for the EU?

Overall, the EU directly supplies 3.1% of its total industrial output — domestic production and imports for re-exporting — to meet US demand. The industrial output likely to be impacted by higher US tariffs from March 12 is modest, accounting for about 0.3% of the total.

The actual loss of industrial output in the EU is likely to be less than 0.3%, as higher tariffs are likely to only lower US demand rather than completely vanishing, or substituting away. The share of EU output at risk would rise to 0.8% should the 25% tariffs extend to copper, timber and lumber, and, most importantly, motor vehicles.

Trade vulnerabilities are significant for industries supplying product lines targeted by tariff actions, as these lines represent a substantial portion of the EU’s total merchandise exports to the US. For instance, targeted steel and aluminum products account for 7.1% of total EU exports to the US. This share increases significantly to 22.6% when including exports of copper, timber, lumber, and motor vehicles.

Tariff impact

In our Scenario 1, a 25% tariff rate would be imposed on US imports of steel and aluminum. This would increase the effective tariff rate on total US imports from the EU from 1.6% to 3.5%. The targeted import lines will span nine ISIC industries, with the iron and steel and air and spacecraft sectors experiencing the largest effective tariff increases.

Import lines under Section 232 investigations for copper and timber and lumber are yet to be disclosed. These are likely to extend the effective US tariff increase on total imports from the EU to industrial sectors such paper and pulp and wood while also raising effective tariff further in sectors such as furniture and non-ferrous metals. Under this scenario — our Scenario 2 — we estimate the US effective tariff rate on EU imports to rise by an additional 0.5 percentage point to 4.0%.

Collectively, this 2.4 percentage point increase in the US effective tariff rate on total imports from the EU from previous and upcoming Section 232 investigations pales in comparison with a potential 25% tariff on US “automotive” imports from the EU. Should the latter be additionally imposed — our Scenario 3 — the US effective tariff rate would increase by an additional 3.2 percentage points to 7.2%.

Country-level vulnerabilities

The exposure to higher tariffs will vary across EU industries and member states, depending on how much of their exports are directed to the US — their export exposure — and how important overall are exports to that industry’s/member state’s total industrial output — their trade intensity. Such vulnerability analysis showcases the maximum likely impact of a total collapse in US imports from the EU, highlighting the full extent of tariffs risk at sectoral and county level.

In Scenario 1, Denmark stands out as the most vulnerable member state as its reliance on the US export market for the targeted product line is twice the EU average. The Netherlands, Austria, Romania, and Sweden also exhibit higher vulnerability owing to both high export exposure to the US and high propensity to export their industrial output. Central and Eastern European member states like Bulgaria, Czechia, Hungary, and Slovakia rank low on vulnerability as they are more indirectly involved in exports to the US.

In Scenario 2, Finland sees the largest increase in its vulnerability relative to Scenario 1, as wider US tariff imposition on timber and lumber would materially impact key Finnish industries such as paper and pulp and wood. The additional tariff increase on copper imports would also raise the country’s exposure in non-ferrous metal exports to the US.

In Scenario 3, a 25% tariff on imports of automobiles widely impacts EU member states, with vulnerabilities rising notably in Austria, Germany, Ireland, Italy, Slovakia, and Sweden. These tariffs are also likely to have the largest indirect impact along the European automotive supply chain, impacting output and exports in downstream industries as well as stage 2 suppliers — for example, Czech intermediate goods production feeding German motor vehicle exports to the US.

Outlook

For the EU, overall activity drag from the tariffs scheduled to come into effect on March 12 is likely to be modest, and is already incorporated in our baseline that assumes a much broader tariff action by the US. Meanwhile, higher defense spending commitments by EU member states such as Germany are likely to increase domestic demand for steel, aluminum, and derivative products, offsetting lost US demand beyond the short term.

Our baseline also incorporates a proportionately less severe counter-response by the EU to US tariff hikes, with the aim of de-escalation. Such a response is likely to include counter-tariffs on final consumer goods imports from the US as well as the activation of the Anti-Coercion Instrument to target digital services in response to US tariffs and measures targeting individual member states.

A blanket 25% additional tariff on all US imports from the EU remains a downside risk to our forecast.

—Shuchita Shukla, Marta Kaczmarek, David Vagenknecht

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.