Europe braces for Trump trade tariffs, as levies on Canada, Mexico, China roil markets

Highlights:

• US faces retaliation from Canada and Mexico
• Experts warn of inflation, slower economic growth
• Trump says tariffs will 'definitely happen' with EU
• Stock markets fall, dollar surges, oil prices rise
• EU leaders meet to discuss tariff threat response

European leaders were bracing for US tariffs on Monday after President Donald Trump imposed sweeping levies on Mexico, Canada and China that will affect billions of dollars worth of trade, roiling global markets and currencies.

Trump said the tariffs against the three largest US trading partners, which take effect on Tuesday, might cause Americans some short-term pain, but "long term, the United States has been ripped off by virtually every country in the world".

Global stock markets and currencies tumbled on Monday on concerns that the tariffs would trigger an economically damaging trade war. The pan-European STOXX 600 index fell 1.3% in morning trading, set for its biggest one-day slide this year and futures for Wall Street's S&P 500 fell 1.4%.

Speaking at his Mar-a-Lago estate in Florida on Sunday, Trump indicated that the 27-nation European Union would be next in the firing line, but did not say when.

"They don't take our cars, they don't take our farm products. They take almost nothing and we take everything from them," he told reporters.

EU leaders meeting at an informal summit in Brussels on Monday said Europe would be prepared to fight back if the US imposes tariffs, but also called for reason and negotiation.

Arriving at the talks, French President Emmanuel Macron said if the EU were attacked in its commercial interests it would have to "make itself respected and thus react". He added that recent declarations from the United States were pushing Europe to be stronger and more united.

Chancellor Olaf Scholz of Germany, the EU's largest economy which is highly dependent on exports, also said the bloc could respond if necessary with its own tariffs against the U.S. but stressed it was better for the two to find agreement on trade.

Luxembourg's Prime Minister Luc Frieden said: "I think tariffs are always bad. Tariffs are bad for trade. Tariffs are bad for the United States."

Trump hinted that Britain, which left the EU in 2020, might be spared tariffs, saying: "I think that one can be worked out".

The US is the EU's largest trade and investment partner and has consistently imported more goods than it has exported to the bloc. The US goods trade deficit stood at 155.8 billion euros ($161.6 billion) in 2023, according to Eurostat data.

However, in services, the US had a surplus of exports over imports with the EU of 104 billion euros.

EU foreign policy chief Kaja Kallas said there were no winners in a trade war, saying that if one broke out between Europe and the United States, "then the one laughing on the side is China".

TUESDAY DEADLINE

The tariffs on Canada, Mexico and China, outlined in three executive orders, are due to take effect 12:01 a.m. ET (0501 GMT) on Tuesday.

Trump said he would speak on Monday with the leaders of Canada and Mexico, which have both announced retaliatory tariffs of their own, but downplayed expectations that they would change his mind.

"They owe us a lot of money, and I'm sure they're going to pay," Trump told reporters.

Economists said the Republican president's plan to impose 25% tariffs on Canada and Mexico and 10% tariffs on China would slow global growth and drive prices higher for Americans.

Trump says they are needed to curb immigration and narcotics trafficking and spur domestic industries.

Financial market reaction on Monday reflected concerns about the fallout from a trade war. Shares in Tokyo ended the day down almost 3% and Australia's benchmark - often a proxy trade for Chinese markets - dropped 1.8%. The mainland China market was shut for Lunar New Year holidays.

The Chinese yuan, Canadian dollar and Mexican peso all slumped against a soaring dollar. With Canada and Mexico the top sources of US crude oil imports, US oil prices jumped more than 1%, while gasoline futures rose nearly 3%.

Trump's tariffs will cover almost half of all U.S. imports and would require the United States to more than double its own manufacturing output to cover the gap - an unfeasible task in the near term, ING analysts wrote.

Other analysts said the tariffs could throw Canada and Mexico into recession and trigger "stagflation" - high inflation, stagnant growth and elevated unemployment - at home.

In Europe, economists at Deutsche Bank said they were currently factoring in a 0.5% hit to gross domestic product (GDP) should Trump impose 10% tariffs on the bloc.

NATIONAL EMERGENCY

A White House fact sheet gave no details on what Canada, Mexico and China would need to do to win a reprieve.

Trump vowed to keep them in place until what he described as a national emergency over fentanyl, a deadly opioid, and illegal immigration to the United States ends.

China called fentanyl America's problem and said it would challenge the tariffs at the World Trade Organization and take other countermeasures, but also left the door open for talks.

Mexican President Claudia Sheinbaum vowed resilience and said she would provide more details on Monday of the retaliatory tariffs she ordered on the weekend. Canada said it would take legal action under the relevant international bodies to challenge the tariffs.

Automakers would be particularly hard hit, with new tariffs on vehicles built in Canada and Mexico, burdening a vast regional supply chain where parts can cross borders several times before final assembly.

Shares in Volkswagen, BMW, Porsche, Stellantis, and truckmaker Daimler Truck all fell by about 5-6% in European trading on Monday.

Analysts at investment bank Stifel estimated that 8 billion euros of VW's revenues would be impacted by tariffs and 16 billion euros of Stellantis.

Shares in US big tech stocks were also lower ahead of the US open, with Microsoft, Alphabet, Amazon and Apple all down between 1.5% to 2%.

Trump imposed only a 10% duty on energy products.