Increased U.S. Tariffs are not just a short-term trend, according to Franklin Templeton investment leaders' views
In a significant shift, the recently announced US tariff regime is set to reshape global trade and investments, with far-reaching implications for Europe and its corporations. The new tariffs, the highest since 1909, are expected to amplify trends such as shifting yields on fixed income, de-dollarisation, and a resurgent European military-industrial base.
The US tariff regime, featuring an average fixed tariff of 22.5% and a minimum of 10% on imports outside Canada and Mexico, has accelerated companies to relocate manufacturing closer to their core markets. This trend is particularly significant for Europe, with Germany, its export powerhouse, bearing the brunt of the impact.
Nearly half of Germany's manufacturing is export-oriented, and the US is a top destination. The new tariffs impose a 15% levy on EU-manufactured vehicles, directly squeezing profits of automotive giants such as Volkswagen, BMW, and Mercedes-Benz. Similarly, machinery and chemical exports face lowered competitiveness in the US, affecting companies like BASF and Bayer. Pharmaceutical firms also forecast significant revenue hits due to tariff barriers.
The economic headwinds in Europe include potential investment delays, job reductions, and pressure on Germany’s export-driven economic model. Some companies may consider relocating or establishing production facilities in North America to bypass tariffs, although these come with cost and risk challenges. In response, European business leaders are calling for stronger industrial subsidies, trade diversification programs, and a more assertive EU trade defense approach to rebalance the relationship.
Europe's response to tariffs is less likely to involve subsidies; instead, it focuses on internal demand and alternative export markets. As the largest consumer market in the world, Europe is a likely alternative export market for companies affected by US tariffs.
The shift in production away from China is structural and slow, with only a 25% shift expected within 2-3 years and full realignment likely to take 5-6 years. Meanwhile, geopolitical considerations are a part of the overall deal between the EU and US, with potential implications for ongoing support for Ukraine.
In a strategic move, Europe is also rebuilding its military-industrial base and diversifying trade with Africa. Luxury goods are expected to remain resilient due to pricing power, with a rise of "tourism arbitrage" (cross-border luxury purchases) anticipated.
The era of cheap labor as a competitive edge is ending, and future competitiveness will rely on technology, quality, and domestic market strength. Emerging markets with strong domestic consumption and tech productivity (like India and China) are expected to outperform labor-reliant peers.
The US may see real investment shifts, but headline investment figures (such as $1.4 trillion of promised investment into the US by Japan, Korea, EU) are likely exaggerated. The energy purchases practices between the EU and US are mathematically difficult to achieve, with Europe potentially buying almost all oil and LNG exported from the US.
In summary, the US tariff regime triggers a global trade landscape marked by supply chain realignment toward nearshoring, escalated input costs particularly in tech and manufacturing, and economic strain on export-reliant European corporations. These dynamics compel Europe, and Germany especially, to diversify markets and seek protective trade policies to mitigate the impact of elevated US tariffs.
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- The US tariff regime has prompted European businesses to reassess their strategies, with many seeking to diversify export markets beyond the US and strengthen industrial subsidies to counteract the financial impact.
- The imposition of tariffs on certain European products, such as automobiles and machinery, has made it challenging for businesses like Volkswagen, BASF, and Bayer to remain competitive in the US market, forcing them to examine opportunities in other regions.
