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Europe is tallying the potential cost of President Donald Trump’s tariffs. The trade war will fray ties between the world’s two most closely bound continents, unstitching some of the trillions of dollars of sales by European companies’ foreign affiliates in the US.
The UK, of course, has been somewhat cushioned by a lower tariff rate. That’s important because — fittingly given its special relationship with the US — it tops the charts of countries with the biggest sales across the Atlantic. The FTSE 100 derives a quarter of its sales from the US; the FTSE 250 a tenth.
Decades of integration have borne fruit. European companies’ income in the US rose by almost a fifth year-on-year to $205bn last year, reckons AmCham EU. The business body estimates that European affiliates in the US reaped sales there of $3.3tn in 2023, more than treble the value of comparable exports.
Multinationals have long banked on broad geographic reach to smooth earnings. Heavy industry is not far behind, including defence. BAE Systems, Europe’s biggest defence company, derives 44 per cent of its sales from the US, more than it garners from its home UK market and the rest of Europe combined.
Or look at tech, another sector caught in the geopolitical riptides. ASML, which produces machines to make chips and is Europe’s biggest tech stock, almost doubled the portion of sales from the US over two years to 16 per cent last year. Its boss has warned that geopolitics threatens to stifle collaboration and thus innovation.
True, European affiliates’ sales in the US are usually backed by at least some production in the country, reducing the tariff threat. Some 20 FTSE 100 companies already have more than a fifth of their facilities in the US, says AJ Bell, led by industrial equipment rental company Ashtead.
European companies will no doubt seek to shift production to the US where possible. In some sectors, there is existing spare capacity. Bernstein estimates that carmaker Volkswagen’s North American production will be only 67 per cent of its capacity this year. But re-localisation opportunities are limited and building new plants and factories will take time.
There are other ways of mitigating tariff impacts — including passing on costs to consumers, sharing them with the supply chain, or diverting shipments to other countries. But the likeliest affect of taxing goods is to reduce demand for them. Expect ports and shipping lanes to be a lot emptier.