Today, Donald Trump’s shock tariff reform announcement has hit stock markets in Europe hard. The pan-European STOXX 600 index suffered a 1.7% decline at the beginning of the session, with the DAX in Germany the most dramatic at 2.4%, reaching a two-month low.
Yesterday the President put his signature on the document called “reciprocal tariff” policy that introduces a standard rate of 10% for all imported goods. The document includes a 20% tariff on imports from the European Union and 10% on goods from the United Kingdom.
China, which is seen as the US’ biggest economic competitor is now faced with a new 34% tariff rate which is much higher than the original one of 20%. To this end, it is expected that China will have a total effective tariff rate of 54% if the new rate is added to the existing ones on U.S. imports from China.
Juncker labeled these tariffs as a “major setback” for the global economy. The Chinese government has reacted strongly by threatening to counter these new regulations and demanding that the US reverse their unilateral actions.
The reaction of the market was rapid and strong. The FTSE 100 index was projected to decrease by 121 points to 8,513 in the UK, while France’s CAC was expected to fall by 127 points to 7,731, and Italy’s FTSE MIB was seen to decrease by around 547 points to 38,010.
Among the most affected by the tariffs are European exporters, particularly those in the automobile industry, as the 25% levy on automobile imports to the US that Trump has previously announced has been declared effective. A similar downturn is expected to affect producers and exporters of industrial machinery, pharmaceuticals, and medical devices.
Banking stocks are hit, with the eurozone banks being the worst, with a 3.1% decrease in July as expectations of the next interest rate decision from the European Central Bank changed. The bank indices from Italy and Spain are no exception, as they decreased by approximately 1.5% each.
The ongoing trading dispute has negatively influenced the previous extensive positive outlook of European stocks during the year 2019. Initially, the optimism was sparked by the stimulus of public spending in Germany, interest rate cuts, and cheap valuation, which helped the European market shine brighter than the American market.
The first quarter of the year became a success story for the Stoxx Europe 600 Index as it outperformed the S&P 500 by a historic high of 15 percentage points in terms of U.S. dollar. But the sentiment is negatively shifting, and some forecasters are predicting further losses in European indexes for the next three months due to the likely introduction of the trade tariffs.
The current market situation is termed as disastrous with the majority indicating that the severity of the reciprocal tariffs, and their immediate implementation are liable to put a great deal of stress on global trade. Some market analysts argue that a worldwide economic crisis is almost inescapable and that the United States cannot be left out of this negative impact.
The automobile industry is a representative case in point of the early hit of the punitive measures, with the Stoxx Auto & Parts Index having dropped as much as 13% from its previous high. Moreover, European wine and spirits makers are also disturbed by the idea of paying 200% of the tariff on drinks imported from the European Union.
Donald Trump’s 25% tariff on aluminum and steel has put manufacturers of these metals industries under the scrutiny of the public. The pharmaceutical sector is faced with a similar crisis with reports of major companies declaring that the tariffs will not pass them over even though they are the most fundamental in the healthcare systems.
According to certain investment strategists, it is wiser not to expose oneself to the market risks by observing a wait-and-see method before the prevailing storm calms down. They also suggest that the bearing of the cost of tariffs or passing them to buyers be the best levels of companies to guard their profits.
On the other hand, people see continuous and severe fallings in European equity markets in the next days. It is almost certain that further escalations will occur before any conciliations are achieved, and the market does not look to be any better which means a short-term recovery would be a miracle.
The European Central Bank has been an example of excellent development in 2018 and 2019 and now their forecasts become subject to great danger because of the immense rise of global trade wars caused by new tariffs. As mentioned by some analysts, the tariffs could sink the expected European economic growth for 2025 by half.
As the result of these shifts, investors have been reducing their investments in a risky manner and the number of safer assets such as government bonds and gold is increasing. Gold has achieved a record-breaking gain spontaneously passing the $2,870 per ounce mark thanks to central bank purchases, an inflation scare, and the fear of deglobalisation.
The tariffs imposed by the Trump administration are exacerbating the situation on the ground and the investors’ migration to secure investments is still ongoing. It is becoming evident that this change in the investing style is directly correlated with the corresponding rise in the concern of a long-run period of instability and doubt and shortage of a global market state.
At the same time, the European Commission has been giving more and more opportunities to citizens to get better access to financial services, while never forgetting to strengthen EU economic growth and competitiveness. On February, the Commission has come up with a simplification package within the framework of the EU competitiveness program, as it was stated.
In addition to this, the Commission has given its consent to a draft interpretation about the reduction of the EU settlement cycle by one day and has started to gather the opinions of the interested parties about the application of the new market risk prudential framework from January 2026.
These activities are part of a series of measures to not only guarantee that the European financial market is more resilient, but at the same time the European companies will suffer less from the administrative burden. However, their implementation might be counteracted by the trade conflicts that are increasingly intensified and might have a bearing on economic growth.
As the situation is getting more and more precarious, market analysts are paying attention to the reactions, in particular, from European and Chinese officials. The fact that whose move is imposed in a reciprocal manner could increase tension and the situation, in turn, will have even more severe consequences on both the world’s trade and economic growth.