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Perspective | Europe’s Top Concerns in a Global Trade Conflict

by bullnews
March 10, 2025
in Opinion
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Perspective | Europe’s Top Concerns in a Global Trade Conflict
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For years now, there’s been an interesting dynamic on the global stage, particularly involving the U.S., China, and various European nations. While countries like China and those in Europe have been churning out more goods than their people absorb, the U.S. has gladly consumed this excess, fueling its appetite with consistent trade deficits. Essentially, the U.S. buys more than it sells, covering this gap by borrowing—debt that Chinese and European investors are eager to scoop up.

This scenario, however, doesn’t sit well with President Trump. His administration is pushing for a shift to what we at Bridgewater Associates refer to as modern mercantilism. At its core, this philosophy holds that trade deficits are ticking time bombs for a nation’s prosperity and strength.

Trump and his followers see these persistent trade deficits as putting America in a precarious position—overly reliant on other economies, vulnerable in terms of national security, and detrimental to middle-class job stability. That’s why he’s rolling out tariffs and other strategic measures dominating today’s news cycle.

These modern mercantilist policies aim to challenge all of America’s economic rivals, but they particularly target Europe’s economic power. If the U.S. pulls back on running hefty trade deficits, the available “pie” for everyone else to produce in excess of their consumption diminishes.

However, this challenge could be Europe’s wake-up call towards necessary reform and rejuvenation. Following Trump’s recent pronouncements regarding Ukraine, Europe has had an eye-opener—it can no longer count on the U.S. for security. This also extends to economic steadiness.

In the current trade dispute, the U.S. actually has leverage because of its substantial trade deficits. There’s more room to impose tariffs on imports than exports, offering a strategic advantage if American firms increase domestic investments and repatriate supply chains.

Contrast this with the trade war back in the Great Depression era, initiated by the Smoot-Hawley Tariff Act. America was running a trade surplus back then, and thus more susceptible to the negative impacts of tariffs and protectionism.

As tariffs gain momentum, countries enjoying trade surpluses with the U.S. will face hurdles in selling their goods stateside. But for European nations, the impact is harsher because their prized industries now fiercely compete head-to-head with China, which has seized significant ground.

China, deeply rooted in modern mercantilist ideals, has long wielded government tools to bolster sectors it deems crucial, even taking sizeable hits financially. At times, it has produced way beyond market demand.

Thanks to years of state-backed tech advancement, China’s asserted itself in numerous domains like automotive, advanced machinery, electrical goods, and even cutting-edge fields like AI that its policymakers highly value. This positions Chinese firms to snatch up large chunks of any remaining trade surplus.

Europe, conversely, feels the squeeze more acutely. With the U.S. less willing to buy its excess products and China presenting stiff competition, Europe faces increasing pressure.

Take Europe’s auto industry—it’s already feeling the heat. Foreign electric vehicle titans such as Tesla and China’s BYD, both buoyed by government support until they turned profitable, are shaking up the market. Meanwhile, European governments remain hesitant to pour public funds into private enterprises, torn between shielding their auto sector from Chinese rivalry and worrying over access to the Chinese market if retaliatory protectionist moves occur.

The threat to Europe’s automotive industry is formidable, with investors so skeptical that they doubt the industry’s survival. If stock values keep plummeting, the economic fallout could ripple across the wider economy, prompting European leaders to consider protective and competitive industrial strategies.

Still, focusing solely on sheltering these longstanding industries would be a misstep unless Europe also addresses the deeper issues at play that weaken its competitiveness: sluggish productivity growth and a lack of innovation. While China has embraced tech disruption (partly state-backed), and the U.S. has outpaced Europe in both innovation and productivity growth in the last ten years, Europe’s been left wanting. Just a glance at the numbers: California alone boasts over a quarter of the world’s “unicorns,” while comparable figures for Germany are a mere 2%.

Europe trails due to its fragmented and redundant regulatory environment, especially within the tech arena, and inflexible labor markets stymieing hiring and firing processes.

These challenges are no secret. A 2024 European Union report on competitiveness, headed by former Italian PM Mario Draghi, didn’t hold back in its critique and offered robust change recommendations.

Some proposals, like a substantial investment in technology and defense sectors—nearly $900 billion worth—promised to be game-changers, tackling some of Europe’s glaring barriers to productivity and innovation. Yet, European lawmakers have been sluggish in heeding Draghi’s calls for swift action.

Nonetheless, the continent might finally be waking up, spurred on by a security crisis. Germany, for instance, has ditched self-imposed fiscal limits to channel significant funds into defense. The question now is whether Europe will capitalize on this moment to transform its economy more broadly, accepting that there really aren’t alternative paths.

Tags: ConcernsConflictEuropesGlobalPerspectiveTopTrade
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