By Vaibhav Tandon

Political strategists understand that foreign policy does not usually win elections; domestic issues determine voters' decisions.  But Europe is very much interested in the foreign policy that will emerge from the U.S. balloting next month.

The economic relationship between the U.S. and Europe is the world’s largest, with over $1.5 trillion worth of goods and services traded annually.  In the wake of the Ukraine war, America has become a top supplier of energy to Europe, providing almost 20% of liquefied natural gas imports.  The linkages extend to capital flows: America is the European Union’s (EU) largest investment destination, accounting for 55% of total direct investment into the U.S.  Commercial linkages between the U.S. and Europe are a source of direct employment for over 9 million people on both sides of the Atlantic. 

The cooperation extends to defense, with European security organized with the United States through the North Atlantic Treaty Organization (NATO).  An insecure region is less likely to enjoy economic prosperity, so the stability of NATO is an important foundation for European growth.

The relations between the two regions are thriving.  European analysts expect ties to be well-sustained under a Harris presidency, as prospective changes to economic and defense ties will be subtle in this scenario.  Addressing U.S. trade imbalances with European member states like Germany is unlikely to be a critical priority for a Harris administration.  She has also pledged support to NATO and Ukraine.

A second Trump administration, however, could renew trade tensions between the two centers.  President Trump imposed tariffs on imports of European steel and aluminum in 2018; the EU retaliated by levying tariffs on certain American-made goods.  A truce was reached in 2021, but the Republican platform calls for 10% to 20% tariffs on U.S. imports from all regions.  

Steel and aluminum tariffs could return, and the former president has threatened new levies on European autos.  Additional duties could also be assessed on over $2 billion worth of imports from five eurozone nations to retaliate for their digital services taxes.  Pressure on the continent to decouple from China would be more significant under this election outcome.

A second Trump administration could also have a bearing on the continent’s security policy.  The former president wants Europe to meet the defense spending targets required of NATO members, as only 23 of 32 NATO nations are expected to fulfil the 2% spending commitment this year.  Trump has threatened to go as far as pulling out of the military alliance.  A full withdrawal seems unlikely, as it would require Congressional approval.  But his administration could force a significant pullback of U.S. involvement in the alliance. 

Deteriorating relations triggered by higher tariffs and national security concerns will not only dent trans-Atlantic trade, but will deter foreign investment and invite market volatility.  All of this could result in significant losses of output.  Goldman Sachs has estimated that the Republican trade platform could deliver a negative shock of up to 1% of the eurozone’s real gross domestic product.

Sensing what could lie ahead, the European Commission has been making preparations to expand its trade and military options.  The Anti-Coercion Instrument, which entered into force in 2023, will allow retaliation against threatening trade policies from other nations.  Countermeasures will include the imposition of tariffs, restrictions on trade in services, and limited access to foreign direct investment and public procurement. 

The European Commission listed economic security and statecraft as the first pillar of its new foreign policy agenda.  Expanding free trade is no longer the primary objective; maintenance might be the best case.  Coordinating policy across member nations will likely be an issue, given varying national interests and competencies in a union of 27 countries.

The formation of a union has forced European nations to balance domestic and foreign interests.  But the United States has shown a recent tendency to keep its own interests in the forefront, and this is what has European capitals concerned.  You can bet that European leaders in the will be up into the early hours of November 6, watching the American election returns.