The US Tariff Shock In 2025 Vs 2026 Same Negative Impact, Different Drivers

(MENAFN- ING)

The rollout of new US tariffs in 2025 triggered months of uncertainty and market volatility. One year on, their impact is becoming clearer. Although the tariff hike was historical, its direct effect on the European economy proved more muted than initially feared. This not only reflected exemptions, tariff front-loading and strong US demand for pharmaceutical imports (especially from Ireland), but also the fact that US tariffs on many competing suppliers also rose sharply in 2025, temporarily preserving Europe's competitive position on the US market. Still, higher tariffs, the stronger euro, and heightened uncertainty weighed visibly on EU‐US trade.

Looking ahead, the drivers of EU-US trade are shifting. The Turnberry deal locks in a 15% tariff rate for EU exports, while tariffs on competing countries are also set to converge towards 15% in 2026. Countries such as China (31.1% effective tariff rate in 2025), India (20.5%) and Indonesia (20.8%) will therefore face substantially lower tariff rates than in 2025, eroding the EU's relative position on the US market. As a result, the drag on EU exports is likely to persist, driven less by uncertainty and tariff asymmetries and more by a deterioration in relative competitiveness.

US tariffs jumped sharply in 2025, but less than feared

US tariffs increased sharply in 2025. The effective tariff rate rose by 8.1 percentage points, a historic jump, but one that ultimately proved less severe than the most adverse scenarios had anticipated. This more benign outcome partly reflected tariff‐stacking rules and sector‐specific exemptions, and partly the ability of exporters to adapt by rerouting trade flows or adjusting the composition of shipments to the US market.

For the EU, the effective tariff rate climbed to 8.5% in 2025, up by 7.2ppt compared with 2024. Despite the EU's common external tariff, effective tariff levels varied across countries due to different export structures and access to exemptions. As such, France, Belgium, and the Netherlands faced roughly half the effective tariff burden of countries such as Germany, Italy or Spain.

Large differences in effectively applied tariff rates, even within the European Union EU‐US exports in 2025: Tariff front‐running, Irish outperformance and a sharp post‐tariff decline

EU exports to the US followed a highly uneven pattern in 2025. Ahead of Liberation Day, exporters rushed shipments across the Atlantic in anticipation of higher tariffs, temporarily boosting exports by up to 35% year-on-year. This front‐loading effect was particularly pronounced in Ireland, where strong US demand for weight loss‐related pharmaceutical products largely offset the negative impact of tariffs throughout the year.

Once higher tariffs took effect, however, EU‐US trade weakened markedly. EU exports to the US, excluding Ireland, fell by 4.1% in 2025, despite exports to the rest of the world increasing by around 1.5% last year. This sharp difference suggests that the tariff shock had a strong negative impact on EU‐US trade, even if it was temporarily masked by front‐loading and Ireland‐specific factors, and broader macroeconomic developments like the strengthening of the euro.

EU exports to the US surged ahead of tariff hikes but fell markedly once higher tariffs took effect Tariff impact in 2025: Uncertainty amplifies the hit, competitiveness cushions the blow

Given these overlapping effects, what was the net impact of US tariffs on EU‐US trade in 2025? To answer this, we isolate and decompose the impact of US trade policy on EU trade into three channels using a regression framework.

The direct tariff effect was immediate and sizeable. Following Liberation Day, higher tariffs triggered a strong fall in demand, depressing EU‐US trade. This negative impact was more than offset by the sharp increase in tariffs faced by competing suppliers on the US market, such as China and India. As a result, the EU effectively regained ground relative to the direct tariff shock. Tariffs also affected trade through non‐tariff channels. Heightened uncertainty initially encouraged tariff frontrunning, but later led to postponed investment and exports, as well as lower trade volumes due to rising administrative and compliance burdens.

Taken together, the direct tariff impact, shifts in relative competitiveness and uncertainty‐related effects point to a net reduction of around 4.2% in EU‐US exports in 2025. This estimate captures the pure impact of tariffs, abstracting from broader macroeconomic conditions. Yet, it aligns remarkably closely with the observed decline in EU exports to the US once the exceptional surge in Irish exports is excluded.

US tariffs are estimated to reduce EU‐US exports by more than 4% in both 2025 and 2026 More certainty, higher tariffs ahead

Against this backdrop, the endorsement of the Turnberry deal by the European Parliament marks a clear turning point in EU‐US trade relations (even if national ratification still has to follow). By ruling out the near‐term use of tariff coercion instruments, the agreement brings greater clarity and predictability. Fixing tariffs at 15% should reduce trade policy uncertainty and ease non‐tariff frictions, lowering compliance costs for firms exporting to the United States.

That clarity, however, comes at a price. Locking in a 15% tariff likely implies a higher effective tariff rate than the 8.5% observed in 2025. As a consequence, the EU's relative competitive position is set to weaken in 2026 as Europe's competitors in the US markets, like China, India, and Indonesia, will benefit relatively more from the US Supreme Court's ruling and the rollback of IEEPA‐related tariffs.

Taken together, higher tariffs and a deteriorating relative competitive position will outweigh the benefits of increased certainty in 2026. Unlike in early 2025, exporters can no longer rely on tariff frontrunning to cushion the impact. Moreover, as firms gradually adjust and substitution possibilities increase, trade responses will intensify. As a result, EU export growth to the US is expected to slow further by around 4.6% in 2026 due to tariffs alone, abstracting from broader macroeconomic developments, even though the underlying drivers differ from those observed in 2025.

Overall, the tariff shock may have been less dramatic than initially feared based on headline numbers, but its economic damage is already evident and is likely to extend into 2026. Diversifying trade towards partners such as Mercosur and India is both a necessary and welcome policy response, but these markets still fall short of the depth of the US market. This reinforces the importance of strengthening the EU internal market as a key policy priority going forward.

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