The European Union faces a significant economic challenge as the United States announces a 20% reciprocal tariff on EU goods, impacting the eurozone's short-term economic outlook. The move, announced by President Donald Trump, follows earlier tariffs on steel, aluminium, and automotive imports, and is seen as part of a broader US economic strategy aimed at strengthening domestic growth at the expense of key trading partners.
Impact on the Eurozone
The new tariffs, set to take effect on 9 April, are expected to significantly affect the eurozone economy, potentially reducing GDP growth by 0.3 percentage points over the next two years. European exports to the US had already increased ahead of the announcement, but the tariffs are likely to reverse this trend, with secondary effects expected on consumer and business confidence.
Analysts warn that the tariffs could mark a return to protectionist measures reminiscent of the 1930s, creating uncertainty for European manufacturers and investors. 'Even if there are no winners in trade wars, some lose more than others,' the analysis points out, highlighting the disproportionate impact on Europe compared to other trading partners.
EU response and retaliation
In response to the tariffs, the European Union has delayed its initial round of counter-tariffs until mid-April, expressing a preference for negotiation over retaliation. However, EU leaders have made it clear that they will respond if necessary. German Finance Minister Jörg Kukies has called for a free trade area between the US and EU, which could eliminate tariffs altogether, but such a proposal would involve lengthy negotiations.
If no resolution is reached, the EU plans to reinstate previously suspended tariffs on a range of US goods, including agricultural products, textiles, furniture, and household appliances. The bloc is also considering measures targeting the services sector, such as tighter regulations on Big Tech and limiting access to public contracts for US companies.
Flavien Neuvy, Director of the Cetelem Observatory, stated: 'We are experiencing a savings rate 3 to 4 points higher than the steady state. In times of economic and political instability, we are in a precautionary savings scenario.'
Vietnam's proactive response
In contrast to the EU's cautious approach, according to Vietnam Plus, Vietnam has taken swift action to mitigate potential economic impacts from the tariff changes. On 31 March, the Vietnamese Government issued Decree No. 73/2025, significantly reducing import taxes on several key products, including automobiles, ethanol, frozen chicken thighs, pistachios, almonds, fresh apples, cherries, and raisins.
One of the most notable changes is the reduction of import taxes on wood and wooden products, including coat hangers, chairs, and furniture, from 20–25% to a uniform 0%. This move, recommended by the Vietnam Timber and Forest Products Association (Viforest) and the Handicraft and Wood Industry Association of Ho Chi Minh City (HAWA), is seen as a strategic decision to avoid potential retaliatory tariffs from the US.
The rapid response from Vietnam has garnered positive feedback from industry leaders, who see it as a practical and timely measure to maintain trade stability. In recent years, Vietnam has become a significant importer of US wood products, with import value growing rapidly. In 2024, the country imported US wood worth 316.3 million USD, marking a 32% increase in quantity and a 34% rise in value compared to 2023. Vietnam is now the second-largest consumer of US wood in Asia and the fourth-largest globally.
Moreover, furniture remains a crucial export category for Vietnam. According to CBS news, about 30% to 40% of furniture sold in the U.S. is manufactured abroad, with China and Vietnam among the top exporters. This further underscores the importance of Vietnam's proactive tariff reductions in maintaining its competitive edge in the U.S. market.
China's role in the furniture market
China is the world's largest furniture exporter, accounting for 29% of the $32.4 billion worth of furniture imported into the U.S. in 2023, according to CNBC. Vietnam follows closely, accounting for 26.5% of imports. Despite around 30% to 40% of furniture being produced domestically, up to 50% of raw materials are imported, including wood, fabrics, and hardware, making cost increases likely even for 'Made in America' products.
Industry experts warn that high tariffs on Chinese imports could significantly impact furniture prices. A proposed 60% tariff could make a $2,000 couch cost up to $2,500 if production were shifted to Mexico, which accounted for 10% of U.S. imports in 2023. Even a 10% tariff would be a burden, especially given the home goods sector's recent struggles amid high interest rates and sluggish housing demand.
During the Trump administration's earlier tariff imposition of 10%, furniture prices increased by 2.3%, highlighting the sensitivity of the sector to import costs. The industry's current fragility makes absorbing new tariffs even more challenging.
Uncertain economic outlook
The tariffs have raised concerns over inflation, with analysts predicting a complex scenario depending on the EU's countermeasures. While tariffs might push prices up in the short term, a prolonged trade conflict could lead to disinflation as companies look to offload surplus inventory. The European Central Bank (ECB) is closely monitoring the situation, with officials suggesting that the tariffs could prompt a pause in monetary policy adjustments.
The ECB had previously indicated a willingness to pause rate hikes, driven by improving growth forecasts and inflation control. However, the new tariffs have darkened the economic outlook, increasing the likelihood of further policy tightening in the coming weeks.
Long-term implications
The EU's strategic response will be crucial in determining the long-term economic impact. While European leaders remain open to dialogue, the lack of flexibility in US trade policy leaves little room for quick resolutions. As negotiations unfold, the eurozone's economic stability hangs in the balance, with potential ripple effects on inflation and consumer confidence.
In the face of these challenges, the EU aims to balance retaliation with a commitment to open trade, but the economic fallout from this latest escalation remains uncertain.
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