US tariffs undermine recovery for European manufacturing
2025 is unlikely to see a long-awaited rebound in European industrial production and metals consumption, primarily steel. While the impact of earlier investments could improve the second half of the year, more substantial changes that have been set in motion to revitalize EU manufacturing have been postponed to 2026, multinational ING bank said.
At the start of the year, industrial production in the EU and the eurozone was 5% lower than two years ago, while it has remained stable in the US, and China recorded a 13% growth in that same period, ING noted in a report published on May 1.
February saw production in both the EU-27 and the eurozone rise to the highest level since August 2024, and in April, the manufacturing output PMI rose to 51.2 — the highest level in almost three years. According to ING, while the longstanding decline in European industrial production, which began in the first quarter of 2023, has shown signs of bottoming out with improved purchasing power, new uncertainties stemming from US President Donald Trump’s import tariffs are now eroding confidence and dampening investment in the manufacturing sector.
EU’s 20% reciprocal tariffs have been postponed for 90 days, but 25% tariffs on steel, aluminum, cars and auto parts remain in place, while most other EU-manufactured goods are now subject to a 10% tariff.
Eurozone exports to the US increased materially before tariff announcements were made, but “as long as tariffs remain in place and uncertainty about further and higher levies lingers, the US [the largest export destination providing 20% of extra-EU trade] will probably no longer be a growth market for European goods,” says ING.
While it is impossible to fully quantify their impact, ING reckons 20% tariffs will shave off 0.3 percentage points of eurozone GDP growth over the next two years. Aside from pharma, the machinery and equipment sectors that in 2024 made up 26% of EU’s Eur530 billion exports to the US – will be among those hit hardest, the bank estimates.
“The picture may change somewhat in the second half of the year, if the trade storm subsides and European producers and consumers can look ahead with more confidence,” says ING adding that “in the meantime, uncertainty over trade barriers remains a major disruptive factor for confidence and investment,” and that “we probably have to wait until 2026 for a substantial increase in industrial production due to government investments in infrastructure and defence.”
The escalation of trade tensions between the US and China will also have a negative effect on EU manufacturing as China seeks markets outside the US for its exports, although European exporters may well show resilience too and successfully shift part of their trade from the US to other countries. Meanwhile, the EU is already pursuing new trade agreements and forging partnerships with countries such as Mexico, Chile, Switzerland, Malaysia, and South American states.
However, conditions will remain difficult for longer for energy-intensive industries given that gas prices in Europe remain four to six times higher than in the US, and electricity is two to three times more expensive, ING estimates. The proposed measures on affordable energy from the European Commission could yield results, but immediate energy supply boosts are unlikely.
A number of steelworks – falling victim to lower domestic end-user demand, especially dwindling procurements by manufacturers of machinery, electrical equipment, and motor vehicles, whose productions declined the most in 2024, — have been shut across Europe recently as global overcapacity in steel has increased to a level that exceeds the total steel production of OECD countries.
The EU is now bracing for its basic industries’ competitiveness to be eroded further as US tariffs are expected to prompt more steel directed to the European Single Market, which in a persisting environment of high energy prices and weak demand will result in an increasing number of basic industrial companies shifting investments away from European soil.
Although the EU housing market is picking up and US import tariffs are having little impact on many European building material suppliers, manufacturers of metal and plastic semi-finished products do not see their prospects improving much for the time being, while a substantial increase in production isn’t expected until 2026.
Discussing other differences between sectors and countries, ING noted that high-tech industries, including electronics and air and spacecraft, are somewhat better off with an uptick in their production levels in February, while basic and mid-tech industries, including machinery and transport equipment, are affected by rapid technological advances and large-scale government investments in China that have made the country a fierce contender in traditional European strongholds.
Within the EU, Spain and Poland have managed to maintain stable production over the past two years, while Germany, Italy, and the Netherlands have experienced a steady decline.
Steel, automotive tariffs cause manufacturing uncertainty
Uncertainty remains over the impact recent US tariffs will have on the steel and automotive sectors, Stephen Phipson, chief executive of Make UK, said during a Business and Trade Committee hearing this week.
“We’re waiting for the full effects,” Phipson noted, highlighting three main areas of concern, with possible direct and indirect impacts on demand and jobs.
“There is a case to be made that some areas, they can probably stand a 25% tariff in terms of the consumer prices, but others certainly can’t. So there would be a direct effect there,” he said.
“There is the indirect effect, particularly around the EU; a lot of our … manufacturers are in the supply chain to EU businesses, which are then exporting final products to the US. It depends on where the EU negotiations end up as to what the effects will be in terms of volumes on UK manufacturing; so, that’s a grave concern,” he added.
For some steel products, he expects buyers to pay the 25% tariff as they cannot currently be sourced domestically in the US.
“With the 25% on steel, which [are] not normal steel products. These are advanced products. These are more specialty steel, specialty components. Now, in a lot of cases, the customers can’t do without those. They’re the single source for those items. So, the consumer will actually end up paying the 25%, but the question … is, does that curtail demand in the process of doing it whilst people re-source, if those tariffs persist for any length of time?”
Stability is also a concern, Kallanish learns from the session.
“We don’t know from one day to the next, whether [US President Donald] Trump’s going to carry on, whether he’s going to suspend, whether he’s going to change; it makes planning your business and your investments extremely challenging,” Phipson said.
“It’s … very difficult to know exactly what the demand reduction will be as a result of tariffs,” he added.
He also highlighted the work manufacturers were doing to mitigate the impact.
“Other manufacturers are … putting in temporary contingency plans at the moment, hoping that in the next month or two we can get some sense, and they don’t have to do the next level, which will be, if you see a demand reduction, scaling back factory capacity.”
He told the committee the manufacturing sector will “absolutely have to” lay off staff if a tariff deal is not done with the US by summer.
“Many of [the] large companies [have] put contingencies in place … [which] gives them maybe three months of gap. So that gives you an order of time scales before there would be a reduction in capacity planned,” Phipson noted.
“For SMEs, they’re living hand to mouth. They want to know day to day whether adding 10% to their product is going to reduce the amount of volume they’re shipping to the United States. And so for them, it’s a much more direct impact; so the larger ones can put this off for a few months, but the smaller ones are going to see it now,” he concluded.
Carrie Bone UK
