Across the Pond: Trump’s tariff Tsunami?
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It's a great pleasure to welcome you to another episode of Across the Pond, where we discuss the big stories and top investment ideas from the Eurozone and Switzerland.

US tariff policy has been a persistent worry for investors since Donald Trump re-entered the White House in January. Now we could be headed for a crucial moment in the global trade conflict. Trump has described April 2nd as Liberation Day, promising to impose a new raft of tariffs to free America from the unfair trade practices of its partners.

Liberation Day certainly looms large for Europe. The American president has had some pretty harsh words to say about the European Union's trade practices. So how hard could Europe be? How might the region respond and how can investors protect themselves? I'm Christopher Swan. And I'm Belinda Peters.

In this episode, we will delve into which sectors are most susceptible to tariffs and which are best placed to weather the storm. And despite the worries over trade, Germany's DAX has been among the world's top markets this year so far. Where do we see the best opportunities? Stay tuned for the answers.

To answer these questions, we are pleased to welcome Dean Turner, CIO Economist for the Eurozone and UK. Thank you for joining us, Dean. Good to be here, Chris and Belinda. Yeah, so just to kick off the discussion, it sounds like Trump has a rather long list of grievances against the European Union regarding trade. And as I understand, it's not a simple matter of tariffs or maybe not even primarily about tariffs.

Yes, sure, Chris. So what we're hearing from the US administration is there are a number of issues that wish to be addressed. Now, first and foremost is the large trade surplus that the EU enjoys with the US. The Office for the US Trade Representative estimates that this surplus ran to some $236 billion in 2024. Moreover, that actually increased by 12% on the previous year.

Now, this surplus has prompted many comments from the White House with regard to the EU employing uncompetitive practices in order to sustain that large surplus in goods trade.

Now, one of the things I would say at this point for balance is that it should be understood that although the size of the trade surplus in goods with the US is a particular focus and is unquestionably large, what this does overlook is the overall trade picture.

If we include services into the equation, we can see that the US actually enjoys a very large service in traded services with the EU, and that reduces the overall trade impact.

Nevertheless, for the time being, goods trade is clearly the focus of the US administration. One thing we often hear about is cars or autos. Who hasn't heard by now about the 10% tariff charged on US cars coming into the EU, whereas the tariff for cars going the other way would only be 2.5%.

What is less mentioned in this discussion is that if the EU were to export pickup trucks to the US, they would actually incur a tariff of around 25%. But it goes beyond cars. Pharmaceuticals is another area where the US administration has a focus. Agricultural products are increasingly in focus as well. And that leads me on to the next point, which is really about the issue of what's considered non-tariff barriers.

Now, agricultural trade is a case in point here. Now, what we're seeing in terms of trade in agricultural goods between the US and the EU is very low. It's a couple of percent depending on what measure we're looking at here. A couple of percent of the total, sorry.

However, one of the things that should be bear in mind is that the regulatory structure in the EU is very different to that in the US. So, for example, genetically modified products, which the US produces a fair amount of, are essentially banned in the European Union. So that's going to be a challenge for both sides to overcome.

I think the other area with non-tariff barriers which often gets mentioned is with regard to purchase tax. In the European Union we call this value-added tax or VAT. Goods sold in the EU are generally charged a purchase tax of around 20%. Compare that to the general sales tax in the US which is somewhere between 8 to 10% and that discrepancy between the two is often highlighted by the US administration.

But again, for balance, we should bear in mind that VAT isn't just charged on imports, let alone US imports. VAT is charged on pretty much every single good and service sold within the European Union. So the EU would probably argue that this is anything but an uncompensative practice, but nevertheless, that's a point that often gets raised.

I think the final point as well is with regards to what's called a digital services tax. Now, this is essentially a tax where the European Union imposes an extra levy on US tech companies in order to try and raise some revenue for the activities that they're doing within European Union countries. And this is really seen by the Trump administration as penalising US companies in particular. So that's going to be another thorny issue to negotiate.

And the final issue on tax as well, which is being spoken about in some circles, is with regards to low tax jurisdictions. There are a few countries in Europe. Ireland is often highlighted because Ireland is home to a number of the European operations for US companies. And the low rates of corporate tax that we see in Ireland is essentially being raised as a question because the US administration feel that that's denying the US tax authorities so much

much needed revenue. So a lot of issues there. So it's going to be an interesting couple of weeks to see how this all plays out. Yeah, that certainly is a long list. I mean, I guess one thing that sort of springs to mind as you're talking is obviously, you know, a trade deficit per se is not a sign of uncompetitive practices. But I mean, I'm assuming that the EU doesn't accept many of these criticisms. And what you I think you touched on a few of the counter arguments that

they make but perhaps you can expand on that just a little

Yes, I mean, I think the first thing I'd focus on is this issue of the differences between services trade and goods trade. Yes, it's absolutely correct that the European Union enjoys a very large surplus in goods, in traded goods with the US. But, you know, the services trade surplus that the US enjoys is some $76 billion in 2024. So a very large number that can offset some of that goods surplus.

I think that, you know, the EU also accepts that tariff rate discrepancies, they are a legacy of former trading relationships, and these can certainly be addressed. And the EU's being very proactive in terms of looking to work towards settlement on this.

I suspect that when it comes to VAT, tax and some other regulatory issues, these are going to be much harder to resolve. The European Union would argue, for example, that a lot of these non-tariff barriers are more about consumer rights protections, but also political preferences of consumers in Europe.

The final thing I would also mention as well is that there is a lot of focus on, especially in the headlines, around tariff rate discrepancies. But when you actually look into the numbers, you'll actually realise that these are very, very small indeed.

So some work by the European Union argues that in 2023, the US collected approximately 7 billion of tariffs on EU exports, whereas the EU only collected around 3 billion of tariffs

on US exports. And clearly that discrepancy has to do with the size of the trade surplus that Europe enjoys. But when we actually put that in the context of all trade that takes place between two regions, it's less than 1% of the value of goods.

And we, of course, don't have a crystal ball. But what could we potentially expect for Europe from Liberation Day? Are there any obvious targets? I know Trump has talked recently about a 200% tariff on European wine, for example, and he's long been critical of the German auto sector.

Yes, that's right. A number of very specific and targeted issues that have been raised in recent weeks. But for my mind, the key areas to focus on are the sectors where the European Union has very large trade surpluses with the U.S.,

If I look at the latest export data, we can see that Europe really enjoys a large trade surplus in areas such as machinery. That includes autos as well, so cars. Electrical equipment, yes.

A lot of that is to do with some of the chip lithography technology that Europe is a world leader in. Chemicals is another area, but within the chemical sector, a lot of the focus will be on the pharmaceuticals sector going forward.

Now, to give you a kind of rough estimate of how important just those sectors are, if the administration were to impose a 25% tariff just on those sectors alone, it could lift the effective tariff rate on European exports from that 1% I mentioned earlier to around 15%. And that would really be quite a dramatic shift in trade policy.

Okay, and then on the flip side, which parts of Europe, in your view, are most insulated? Well, look, I think there's a couple of things to consider here. We obviously focus on Europe being very much a trading nation. You know, it's a region that enjoys very large trade surpluses with a number of countries. But one of the things we shouldn't overlook is the fact that Europe has a very large internal market. And whilst trade with the U.S. is important, it is not the only driver of economic growth.

I think that when it comes to Europe as well, there is also the possibility that Europe can reorientate. It can focus trade relationships more on local markets, perhaps repairing some of the disruptions with the UK market, which again, as the fifth largest economy in the world, the UK is actually the second largest trading partner for the European Union, certainly in terms of European exports. So there could be more work to be done there.

But also, you know, Europe could also focus on rebuilding relations with China, which have clearly been under pressure of late. Yeah. And then I guess there's the issue when countries confront tariffs, there's always the question of, you know, do they take it on the chin or do they retaliate? What do you think is the most likely outcome from Europe?

Well, it's hard to know ahead of any announcements, but certainly the mood music coming from the European Commission is that they are prepared to hit the US with equivalent tariffs, much the same as what we saw in reaction to the impositions of tariffs on steels and aluminium, where we saw specific products targeted, such as Levi jeans, bourbon whiskey, and again, the

retaliation from that has been a 200% tariff proposed on EU exports of alcohol. But look, I think we need to be prepared that Europe doesn't see itself as the victim here and it does have the scope and is willing to retaliate on a like-for-like basis.

What I would say as well is that there are other measures that the European Union could propose in order to ease tensions. I suspect that what we will see a lot of movements from the private sector, and that could be to shift some production to the US.

At the European Union level we could see more focus on purchase agreements. One area where the European Union clearly has a deficit or a need is in energy. And the EU could look at focusing on buying more energy products, so liquefied natural gas for example, from the US in order to ease some of those tensions.

And having said all of that, do you see any ways for investors to reduce exposure from tariffs in Europe? It's clearly going to be a troubling time for investors. There's one thing investors don't like, it's uncertainty. And certainly the April, the second deadline, is presenting a lot of uncertainties for investors. But for those investors who are worried about trade, there are parts of the market that are less exposed.

One of the things that we focus on is our six ways to invest in Europe. This explores single stock opportunities and across a number of drivers that can be beneficial for the European equity markets in the near term. Just to highlight a

A couple of those. You know, Europe hasn't been sitting idly by in response to the changing rhetoric coming from the US. We've had a huge fiscal expansion announced in Germany. There'll be much more focus on rearming Europe.

And that could be an area that potentially becomes attractive to investors over the coming months. I think we've also got to keep an open mind about the possibility of a ceasefire between Russia and Ukraine and other things being equal. This should provide a modest uplift to certainly sentiment.

but potentially activity in Europe, especially if we were to see that energy prices could come down. That's a factor that could help the much beleaguered manufacturing sector in Europe as well. And what about sort of the corporate bond market? I mean, again, lots of potential investment opportunities there and also sort of areas that are likely to be a little less exposed to trade tensions.

Yeah, that's right, Chris. I think one of the things we, well, a couple of things we'd focus on when it comes to the fixed income markets. You know, look, quite frankly, the supplier dynamics coming from the government sector probably doesn't favour owning longer data bonds.

But when we're looking at some of the corporate bonds, if we think of the sectors that are going to be less exposed to tariffs, you know, areas such as consumer staples, the financials, utilities sector, telecoms, these are all areas that should benefit from some of that easing of fiscal policy, but also be sheltered from U.S. tariffs.

And again, just mentioning that potential ceasefire in the Ukraine. This could be of benefit to the materials and the industrial sector, which hopefully could benefit from lower energy prices. But also, again, just to reiterate a couple of those points I made about the equity sector, defence spending, infrastructure spending. These are all areas where we expect to see a material shift coming in Europe over the coming decade.

Well, thanks so much for taking the time, Dean, and thanks to our listeners as well. We can't delve into specific securities on these podcasts, but you can explore some of these with your UBS representative. And we also very much recommend our equity compass, which goes into lots of detail about where we see the most value.

But just to sum up here, we recommend that investors consider a selective, diversified and risk-return optimized portfolio in Europe, guided by our theme "6 Ways to Invest in Europe". The auto, consumer, industrials and materials sectors may face the most impact, while telecommunications, utilities, financials and healthcare should be less affected. We advise focusing on companies with strong pricing power or primarily local for local offerings.

We'll be back soon with another installment of Across the Pond. In the meantime, have a great week.

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