In the event of a confrontation, Europe has many advantageous tools against America. However, some of them would be so damaging that they cannot be used, writes The Economist.
“The action needed must be bold and determined,” declared Ursula von der Leyen, President of the European Commission.
She argued that the European Union must respond to Trump’s tendencies to break “supposedly iron-clad commitments,” thus threatening “European values.”
“Extraordinary times,” she said, “require extraordinary measures.”
So far, the EU’s response to Trump has been rather conventional. After America imposed a 25% tariff on steel and aluminum on March 12, Europe said it would impose retaliatory tariffs on American imports worth 8 billion euros ($9 billion) starting April 1, and from mid-April, it would tax additional imports worth 18 billion euros.
Despite von der Leyen’s belligerent tone, Europe does not want its dispute with America to escalate and hopes that Trump will back down. But if disagreements with America were to deepen, the EU has numerous ways to exert pressure on its tough ally. The EU’s most obvious geopolitical asset is the size of its market. Together with Britain, Norway, and Switzerland, the continent’s GDP reaches $24.5 trillion, nearly as much as the U.S. GDP of $29 trillion.
American companies, from brewers to banks, want to continue doing business in Europe. Europe’s retaliatory tariffs would be quite effective. They were initially imposed on luxury American goods that are easily replaceable, such as Harley-Davidson motorcycles and whiskey. The problem is that tariffs or other restrictions on American imports harm both European consumers and American exporters. One example is energy, the largest import from America to Europe.
Last year, energy accounted for 35% of American oil exports. More than half of America’s liquefied natural gas also went to Europe. Demand from Europe, which is likely to continue growing until 2030, guarantees many of the gas export projects currently being developed in America, worth billions of dollars. If Europe were to limit its purchases of liquefied natural gas from America, many American energy companies would face trouble.
But if it did so, Europe could harm its already weak economy or end up back under Russian dependence, which would be alarming. A better target would be America’s large technology companies. Europe could live without Instagram, a social media platform owned by American company Meta, but Meta would be severely hit by the loss of European revenue.
Europe has many ways to financially hit such American companies without completely blocking them from the European market, including taxes and competition policy. This allows Europe to calibrate the level of impact, slowly tightening the screws if necessary.
The fact that these giant American tech companies pay little tax in Europe has been a point of debate in transatlantic relations for years. The low tax revenues are partly Europe’s fault, as it has allowed Ireland and other countries to act as tax havens within the EU. European states have imposed taxes on online advertising and other digital services, enabling governments to capture some of the revenue from these American companies.
Efforts to reach a global agreement on such taxes have stalled because Trump does not support it. European countries could individually raise tax rates, or the EU as a whole could reintroduce taxes it had left on the shelf. For an EU-wide tax, all European countries must agree, which might be difficult but not impossible if diplomatic weather turns stormy.
The European Commission also has extraordinary regulatory power over American tech companies. It can play with antitrust policies, order the removal of harmful content, and strictly enforce privacy laws. Fines for companies that violate these rules can reach billions of euros. Although European authorities adhere to the rule of law and do not engage in prosecutions for political revenge, a tougher stance would have the desired effect.
American financial companies are also at the mercy of European institutions. Some of the tools available to the EU are so powerful that they may never be used. For example, the global payments system is SWIFT, an organization headquartered in Belgium that handles about 8 billion electronic messages annually between 11,000 financial institutions.
European regulators have significant influence over SWIFT’s financial operations. But if Europe were to limit American banks’ access to the system, it would cause a financial catastrophe, as blocking global transfers would harm both European and American banks alike.
Competition rules would be a softer way to hit American financial companies. Regulators in the EU and Britain are investigating the favorable position that American companies Mastercard and Visa enjoy in the European payments market. Another lever is regulatory laws. Europe could require foreign banks and asset managers to provide more capital to finance their European operations.
It could also impose stricter local requirements for the storage of sensitive data, and so on. America could retaliate in the same way, but it would be at a disadvantage compared to Europe in a services sector war. Overall, America exports around 100 billion euros more services to the EU than vice versa.
The opposite is true for trade in goods, where Europe recorded a surplus of nearly 200 billion euros last year. (In the case of Britain, the reverse is true: the country has a surplus in services with America but a deficit in goods). Furthermore, market size is not the only source of Europe’s economic leverage. It can also restrict American access to goods or services where Europe dominates.
A recent report by the French agency CEPII highlighted many product groups that are mainly produced in Europe and imported in bulk by America, particularly in pharmaceuticals and chemicals. Of course, the EU would not crush America by, for example, limiting sales of Wegovy, a diabetes drug produced by Danish company Novo Nordisk, but the European bloc controls a strategic industry: the machinery used to produce the world’s most advanced computer chips.
ASML, headquartered in the Netherlands, is the only company in the world that makes equipment capable of creating chips of seven nanometers or less, the type used for the latest Artificial Intelligence. Even for machines that produce slightly thicker chips, at 14 nanometers, ASML holds a 90% market share.
Limiting exports from ASML would not be unprecedented. In 2023, the Netherlands stopped some sales to China. But Europe’s relationship with America would have to deteriorate enormously for it to receive the same treatment as China. Moreover, just like with the SWIFT system, interrupting the semiconductor supply chain could have terrible and unpredictable consequences that could also harm Europe itself.
Europe also dominates another industry: global commodity trade. It is not as large an exporter of most raw materials, but it is an indispensable intermediary. The region’s scarce natural resources, its central location, and a long history of open trade have helped stimulate all activities critical to the movement of goods worldwide, such as transport and insurance.
If relations with Europe were to cool, America could find it very difficult to sell its resources anywhere in the world, not just in Europe. Europe is home to the world’s largest commodity traders. Switzerland alone has around 900 such companies, including giants like Glencore, Gunvor, Mercuria, and Vitol. Europe’s share of global trade is 35% for oil, 60% for metals, 50% for grains, and 40% for sugar. Britain and the Netherlands are also major trading hubs, reinforcing Europe’s dominance.
Over the decades, Europe’s trading houses have built an extensive network of suppliers, storage facilities, transport infrastructure, and banking relationships that enable them to link producers with consumers in every part of the globe. Connecting distant mines and farms with cities and factories is a complicated task that cannot easily be replicated.
An Irreplaceable Role
The largest transport companies, such as Maersk, MSC, and CMA CGM, are all European. Oldendorff, the world’s largest bulk carrier company, is German. Greek companies own more than 30% of all oil tankers and more than a fifth of the global liquefied natural gas fleet.
Although many Asian countries also have large maritime transport industries, Europe vastly outperforms America in this market share. Meanwhile, European financial companies facilitate commodity trade in a way that American firms cannot. London, with its network of intermediaries and insurance firms, facilitates more than 40% of energy insurance at sea.
The 12 “clubs” of protection and indemnity that make up the International Group of Britain provide the vast majority of the world’s oil tanker fleet. European banks have a very strong presence in financing commodity trade, a market where American banks are absent. On March 10, trading company Trafigura, based in Singapore, said it had raised $5.6 billion to finance its operations. European lenders made up five of the seven banks that arranged this deal, with Dutch bank ING leading the group.
Recently, Europe has attempted to use this influence to punish Russia for its invasion of Ukraine. It has stopped European traders from dealing Russian oil, has stopped European banks from financing oil trade, has blocked European ships from transporting it, and has stopped European insurance firms from insuring it, except when the oil is sold for less than $60 per barrel. Although Russia has found ways to bypass this cap, it has increased costs for Russian firms and reduced the country’s oil revenues.
It is another matter whether Europe would ever want to use such tactics against America. Perhaps it would impose an additional tariff system or taxes that are less strict than Russian sanctions, making international trade more expensive for American firms. But it would be such a significant and hostile step that it could only be imagined if relations were severely strained. Europe would surely never treat America as it treats Russia, no matter how fierce the trade war may become.
The most lopsided transatlantic relationship is defense. Europe depends heavily on America’s military support. It has much more to lose than America from the breakdown of this agreement, while America, as Trump recently said, is protected by “a vast and beautiful ocean.” But this defense is not untouchable. And the fact that Europe has more to lose does not mean it has no influence.
