Escalating Trade War 2.0.: Key insights for EU exporters on U.S. tariffs on cars, and new reciprocal trade measures

The concerns of rising trade tensions between the U.S. and, among others, the EU are materializing. Since the entry into force of a 25 % tariff on all steel and aluminium products imported into the U.S. on 12 March 2025, the Trump administration has taken additional escalatory steps. On 26 March 2025, U.S. President Trump invoked his authority under Section 232 of the Trade Expansion Act of 1962 (“Section 232”) to announce a 25 % tariff on imports of passenger cars, light trucks and certain automobile parts. As widely covered in the media, these two rounds of additional tariffs were followed by “Liberation Day” on 2 April 2025 and the announcement of broad and far-reaching “reciprocal” tariffs. The following contribution provides a snapshot summary of the rapidly evolving relevant facts for EU stakeholders. It (A.) explains the additional tariffs on cars and car parts and (B.) turns to the scope and character of the reciprocal tariffs, capturing the policy situation as of 8 April 2025 at 11.30 a.m.

A. Background and scope of the 25% tariffs on car imports and impact on the EU automotive industry

On 26 March 2025; U.S. President Trump explained in his Presidential Proclamation that the large number of car imports into the U.S. was a national security threat to the vital U.S. automotive industry. These newly introduced tariffs are aimed at strengthening the U.S.’ domestic industry by incentivizing companies to relocate their production sites to the U.S. and at reducing trade deficits. The new tariff will reportedly on average add about USD 6.000 to each imported car for U.S. consumers and also render car parts (engines, transmissions, powertrain parts, and electrical components) likewise significantly more expensive for U.S. consumers. The White House reserves the right to extend the list to additional car parts. Importers of cars under the U.S.-Mexico-Canada agreement (“USMCA”) may be partially exempted from the tariff if they can certify that some parts are of U.S. origin. The tariff will then only apply to the value of their non-U.S. content. USMCA-compliant car parts will initially be exempted, until a system can be set up to include their non-U.S. content. The new tariff entered into force on 3 April 2025 for cars and will do so for car parts on 3 May 2025 at the latest.

Germany is among the most significant exporters of cars into the U.S., alongside Mexico, Canada, Japan and South Korea. The President of the German Association of the Automotive Industry (“VDA”) Hildegard Müller condemned the new tariff as a “disastrous signal for free, rules-based trade”. She called for urgent negotiations of a bilateral agreement between the U.S. and the EU to resolve the tensions. During his first term, U.S. President Trump had already sought to introduce additional tariffs on German cars. At that time, executives from Germany’s automotive industry made an “emergency visit” to the White House. Now, German and other EU carmakers are confronted with a critical decision: whether to yield to the pressure and act independently by relocating further production to the U.S., or to trust in a strong response from the EU to defend their interests.

B. The scope and character of the U.S.’ “reciprocal tariffs”

The U.S.’ newly introduced “Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits” are based on the International Emergency Economic Powers Act (“IEEPA”) claiming that “the trading relationship between the United States and its trading partners has become highly unbalanced” posing a “threat to the national security and economy of the United States” (see Presidential Proclamation).

They comprise two different measures. First, a 10% tariff on a large number of countries which already took effect on 5 April 2025 (at 12:01 a.m. EDT) and second, an individualized higher reciprocal tariff on such countries with which the U.S. has the largest trade deficits, taking effect on 9 April 2025 (at 12:01 a.m. EDT). The EU, for instance, is set to encounter a reciprocal tariff of 20% whereas other countries face tariffs up to 50% (see Annex I).

The additional measures apply ad valorem broadly to all products imported from the listed countries, with certain exemptions, including:

(i) the steel, aluminum, car, and car parts that are already covered by the recently introduced new U.S. tariffs are exempt. The Presential Proclamation also exempts any future products that become subject to Section 232 tariffs.

(ii) certain other products as listed in Annex II to the Presidential Proclamation, such as copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, and energy and energy products. Here, it is expected that at least for some of these product categories, product-specific U.S. tariffs are underway.

(iii) low-value de minimis parcels pursuant 19 U.S.C. 1321(a)(2)(A)-(B). This exemption interestingly does not apply to low-value imports from China.

(iv) with respect to goods that also contain U.S.-components, the tariffs shall apply only to the non-U.S. content of goods, provided that at least 20 % of the value has U.S. origin.

Canada and Mexico are (mostly) exempt as they have already faced border emergency tariff actions. But there are caveats as non-USMCA compliant goods will be subject to a 25% tariff, and non-USMCA compliant energy and potash will see a 10% tariff. In the event that the existing border emergency tariff actions are terminated, USMCA compliant goods would continue to receive preferential treatment, while non-USMCA compliant goods would be subject to a 12% reciprocal tariff.

Also, the reciprocal tariffs do not apply to Russia and Belarus, with which U.S. trade has however decreased dramatically since the beginning of the invasion of Ukraine, mainly due to far-reaching U.S. sanctions.

Although the methodology for calculating the “reciprocal tariffs” initially appears complex it seems to mostly calculate the tariff rates by dividing the trade deficit between the U.S. and a specific country by the total imports from that country, then halving that result. This serves as a “proxy” methodology, to address and presumably negotiate different tariffs, regulations, taxes, and other policies in place and highlights the U.S.’ goals of eliminating trade deficits along with third-country tariffs and everything the U.S. administration perceives as non-tariff barriers to trade. Section 4 of the Presidential Proclamation underlines this point by providing space for modifications. It stipulates that “[s]hould any trading partner take significant steps to remedy non-reciprocal trade arrangements and align sufficiently with the United States on economic and national security matters, I may further modify the HTSUS to decrease or limit in scope the duties imposed under this order.” The Presidential Proclamation conversely comes also with the warning that should a trading partner retaliate, the U.S. would increase or expand the additional tariffs.

C. Potential reactions by the EU and considerable uncertainty ahead

The U.S. is one of the EU’s most significant trading partners, accounting for 17% of its total foreign trade turnover (imports and exports) in 2024. It also ranks as Germany’s largest foreign trade partner. Consequently, the impact of the recently announced measures and potential countermeasures on the European and German economies is expected to be substantial. This has heightened concerns within the German industry about the potential repercussions, as well as the possibility of further tariff measures.

EU Commission president Ursula von der Leyen expressed her concerns regarding the tariff escalation as new tariffs would harm both companies as well as consumers. She promised to engage in negotiations with the U.S. administration and to rigorously defend the interests of EU companies. Specific EU countermeasures have not (yet) been disclosed but talks in Brussels are ongoing. The EU has reacted to recently introduced steel and aluminum tariffs by announcing to reinstate tariffs on certain US exports, such as Harley-Davidson motorcycles and Kentucky bourbon, originally imposed in 2018 and suspended in 2021. These countermeasures have been recently postponed to mid-April. Additionally, the EU Commission intends to introduce further countermeasures, potentially targeting American agricultural products and technology goods. Countermeasures in response to the U.S.’s “reciprocal tariffs” are expected to be revealed by mid-April. Meanwhile, other countries have reacted more swiftly. China already announced a 34% retaliatory tariff on U.S. goods, matching the U.S.’s initial tariff, which now the U.S. plans to counter with an additional 50% tariff on Chinese goods. More changes are ahead as the situation evolves, so stay tuned for updates.