President-elect Donald Trump ramped up his rhetoric on trade on Friday, warning the European Union that it must significantly reduce its trade deficit with the United States by buying more American oil and gas or face tariffs.
“I told the European Union that it must make up for its huge deficit with the United States by buying our oil and gas on a large scale. Otherwise, it will just be tariffs,” Trump posted on his Truth Social platform shortly after 1 pm ET.
The trade deficit between the United States and the EU in goods and services amounted to 131.3 billion dollars in 2022, according to U.S. government data. While Trump's remarks were consistent with his protectionist approach to trade policy, they drew immediate reactions from EU officials.
“The EU and the United States have deeply integrated economies, with overall balanced trade and investment,” European Commission spokesman Olof Gill said in a statement to CNBC. “We stand ready to discuss with President-elect Trump how we can further strengthen an already strong relationship, including by discussing our common interests in the energy sector.”
Gill added that the EU remains committed to phasing out energy imports from Russia and diversifying its sources of supply.
Energy links and economic imbalance
The United States is the largest single market for EU exports, with a share of almost 20% of the bloc's exports. However, there is a significant trade gap in the machinery and vehicle sector, of which the US has been running a deficit 102 billion euros (106 billion dollars) in 2023. In contrast, the United States enjoys a trade surplus in energy and services, including a energy trade surplus of 70 billion euros with the EU, fueled by growing American oil and gas exports.
The United States is the world's largest oil producer and contributes 22% of the global offer in 2023, a figure expected to increase in 2024 thanks to Trump's deregulation policies. The EU has already signaled its intention to buy more American liquefied natural gas (LNG) as part of its strategy to replace Russian energy imports. Last month, European Commission President Ursula von der Leyen noted that energy imports from the United States could be a cost-effective alternative to Russian gas.
A senior EU diplomat, speaking anonymously to CNBC, said Trump's comments were not surprising and that energy was a “logical” area for the EU to expand trade with the United States. German Chancellor Olaf Scholz reportedly discussed the issue with Trump in a phone call Thursday evening.
The markets react with caution
European stock markets fell sharply on Friday following Trump's comments, while the euro strengthened 0.2% against the US dollarreaching $1,038. Uncertainty surrounding Trump's tariff threats contributed to market volatility as analysts weighed the potential economic impact of new tariffs on transatlantic trade.
EU braces for potential tariffs
Trump's trade threats are consistent with his campaign rhetoric, which included promises of sweeping tariffs on trading partners such as China, Mexico and Canada. He proposed additional tariffs of 10% on Chinese imports AND 25% on goods from Canada and Mexicosignaling a broader push towards protectionist policies.
The EU, however, is preparing to respond. European Council President António Costa underlined the EU's willingness to engage constructively with the United States
“The message is clear: the European Union is committed to continuing to work with the United States, in a pragmatic way, to strengthen transatlantic ties,” Costa said after the meeting of EU heads of state on Thursday.
Yet some European leaders warn against unilateral agreements. Enrico Lettaformer Italian prime minister and dean of the IE School of Politics, Economics, and Global Affairs, argued that the EU should take a firm position.
“It's a transactional approach. We have to respond to this transactional approach,” Letta told CNBC Squawk Box Europe. “Trump is mixing energy with tariffs on goods, manufacturing and so on. I think this is wrong because these issues are completely unrelated.
Letta suggested that the EU could respond asymmetrically, potentially targeting the financial sector, where the United States has significant leverage.
Preparing for a protectionist turn
European officials have been preparing for months for a potential turn to American protectionism under a second Trump administration. The EU has also sought to strengthen ties with the United Kingdom, which left the union in 2020, as a hedge against potential trade and defense conflicts with the United States.
While Trump's rhetoric has raised concerns, analysts warn that his threats could be part of a negotiating strategy. The extent to which tariffs will be implemented remains uncertain, but the potential for a more adversarial US-EU relationship looms as Trump prepares to take office in January 2025.
With both sides underlining their willingness to negotiate, the coming months will determine whether Trump's hard-line approach leads to deeper cooperation or an escalation of trade tensions.