What’s next for European manufacturing under the US tariffs?

On 27 July, the EU reached an agreement with the US announcing a 15% single tariff rate ‘for the vast majority of EU exports,’ ahead of the 1 August deadline. While the initial announcement by US President Trump was 30%, the current deal left many wary.

Back in April, the US President Trump announced the so-called “reciprocal tariff” framework and a threat of starting a trade war with its major trading partners, including the EU.

Last year, the US was the largest partner for EU exports of goods (20.6%) and the second largest partner for EU imports of goods (13.7%), according to the Commission. Among the top exported manufactured goods were pharmaceutical products, machinery, nuclear reactors, vehicles, electrical and electronic equipment (Trading Economics).

“The best we could get” but not for major European manufacturers

President von der Leyen shared a single 15% tariff rate has been reached, highlighting it was ‘a clear ceiling, no stacking, all-inclusive’ deal for the majority of EU exports, including automotive, semiconductors and pharmaceuticals.

While President von der Leyen focused on the final clarity the deal brings, the automotive industry, largely represented by German players, is anticipating losses. Hildegard Müller, President of VDA (German Association of the Automotive Industry), released a statement highlighting ‘the US tariff will cost the German automotive industry billions annually and will burden them in the midst of the transformation.’

The New York Times reported an over 3% drop in shares on Monday for major German carmakers, like Volkswagen, Porsche, BMW and Mercedes-Benz. Followed by 4% drop for Porsche and Stellantis, which own Peugeot and Fiat.

Strategic products with zero-for-zero tariffs

According to President von der Leyen, zero-for-zero tariffs will apply to strategic products, like ‘all aircraft and component parts, certain chemicals, certain generics, semiconductor equipment, certain agricultural products, natural resources and critical raw materials’. Amidst the announcement, the list is not final yet.

When it comes to the steel and aluminium market, the global overcapacity has impacted both the US and the EU markets. The current 50% US tariff could be reduced or even replaced by a tariff rate quotas (TRQs) system, leading up to the creation of a “steel club”. This could, in turn, raise concerns with other countries EU is negotiating and building new trade relations. However, the actual impact of the deal remains to be seen, as the statement from the US side does not include TRQs, stating the current 50% tariff – for steel, aluminium and copper – remains unchanged (FTI Consulting EU).

Conflicting commitments

On the other hand, the EU has committed to investing USD 750 billion in US Liquefied Natural Gas (LNG) and nuclear fuel over the next three years, reasoning that the goal is to phase out any dependency on Russian commodities. Indeed, petroleum oils were the most imported products from the US in 2024 (Eurostat). However, this big investment seems to contradict Europe’s path to renewable energy and the goals set out in the Clean Industrial Deal.

While the trade deal may be seen as a geopolitical necessity in the short term, it undermines Europe’s clean-energy trajectory, especially if it diverts capital and policy focus away from renewables and industrial electrification.

Miccinilli highlights that a promise to buy any kind of US energy – from LNG to nuclear fuel – will need to be framed per vector, demand and involve private companies. It will also need to align any deal with current EU and US regulations.

Whatever deal is on the table, the EU will need to treat this purchase pledge as temporary and transitional. It should ring-fence it from the funding streams under the Clean Industrial Deal and maintain robust incentives for clean energy investments within the EU.

Big risks ahead

“US AI chips will help power our AI gigafactories and help the US to maintain their technological edge,” briefly stated President von der Leyen. But what is the underlying impact of it? Advanced manufacturing and new innovations rely on AI chips. If we bring the asymmetry of power into our critical infrastructure, what will the future of our industry look like?

At the same time, the Commission’s AI continent action plan aims to “turn EU strengths, such as unparalleled talent and strong traditional industries, into AI accelerators.” AI Gigafactories will develop and train complex AI models at a massive scale, maintaining energy and water efficiency, as well as circularity. The EU sees AI Gigafactories as the means to address global supply chain disruptions and strengthen its single market.

While the EU-US trade agreement doesn’t go hand in hand with the EU’s vision for AI, Gagliardi states an important message: “Europe should invest big in European fundamental research on AI, promote the design and production of domestic AI chips and retain unique expertise in chip production.”

EU leverage

Europe’s hard power might be in software. The US has been adamant about dominating in AI, but the EU needs to charge through. As the AI adoption is still low (13.48%, according to Eurostat), the European manufacturing sector needs to build on momentum to unlock its full potential. Another option would be to lead in the scale of AI adoption rather than AI disruption. Deploying AI across Europe’s infrastructure could be an option. A synergy of both, instead of ‘either or’, scenarios would benefit the EU in the long run.

For the automotive sector, advanced manufacturing technologies, digitalisation and sustainable production methods can bring a new competitive edge. Europe is known for its high quality. Focusing on high-end automotive might enforce our position. The Action Plan for the Future of the Automotive Industry comes at the right moment to boost this transformation.

Europe stands firm on its net-zero ground – raising the binding renewable energy targets for 2030 to at least 42.5%, nearly doubling its previous goals. This ambitious target is supported by the Renewable Energy Directive and the REPowerEU plan. In the first quarter of 2025, the EU’s electricity generated from renewable sources has already reached 47%, a significant rise from previous years (Eurostat).

As the only continent with an unwavering plan to use clean and renewable energy moving forward, Europe’s strategy lies in its aggressive policy targets, ongoing structural energy transition, backed up by large investments and innovations. Climate leadership is Europe’s key differentiator in the global market. And it should stay this way.

The latest report from Bitz&Pretzels and Speedinvest shows that the largest R&D investors in Germany, namely Volkswagen, Mercedes-Benz and Bosch, dedicate only 10% of their budget to external projects, compared to 30% in the US. This means overlooking the startups alongside fragmented and isolated innovation, coupled with an overall challenge to commercialise research. Building on what Europe already has, changing the mindset and creating synergies will be key.

As negotiations are still in place, it is clear that the next steps for Europe will be to strengthen its focus on sectors where it can build leverage. With robust policies, new international agreements with trade partners from across the globe and laser focus on the overarching EU Green Deal, the Commission can create favourable conditions for the market to flourish, from AI and advanced manufacturing to clean tech.