On January 17, Trump announced the imposition of a 10% tariff on eight European countries, effective from February 1. Simultaneously, he declared that the tariff rate would increase to 25% starting June 1, until relevant parties reach an agreement on the US's "comprehensive and thorough purchase of Greenland." In the short term, regarding asset impact, for the euro, on one hand, tariffs and geopolitical friction may further weaken Europe's economic growth, negatively affecting the euro; on the other hand, the recent rise in US policy uncertainty may cast more doubt on the reliability of the US as an investment destination, thereby negatively impacting the US dollar. The market's trading contradiction in this trade friction may be more concentrated on the latter. CICC's main views are as follows: The latest developments in the US-Europe tariff dispute: On January 17, 2026, Trump announced the imposition of a 10% tariff on eight European countries, effective from February 1. Simultaneously, he declared that the tariff rate would increase to 25% starting June 1, until relevant parties reach an agreement on the US's "comprehensive and thorough purchase of Greenland." The eight European countries involved include: Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland, six of which are EU member states (excluding the UK and Norway). On Wednesday, Trump stated that after negotiations with the NATO Secretary General, the tariffs originally scheduled to take effect on February 1 on a series of European countries would no longer be imposed. Subsequent changes in related matters and Europe's response remain highly uncertain. Prior to this, besides most EU exports to the US being subject to a maximum tariff rate of 15%, the EU trade agreement also committed to increasing investment in the US, purchasing US energy products and chips, eliminating tariffs on US industrial goods, and reducing non-tariff barriers for food and agricultural trade. The EU's Leverage and Shortcomings: From the perspectives of trade volume and structure, investment scale, and employment, the economic ties between the US and Europe are close, providing multiple points of leverage. The EU and the US have the world's largest bilateral trade and investment relationship. The EU accounts for the highest share among US export regions, reaching 17% of total US exports in February 2025, higher than China (6%), ASEAN (6%), and Japan (4%). Simultaneously, the EU is also the largest source of FDI for the US. In 2023, the EU's stock of direct investment in the US reached $2.4 trillion, higher than Japan ($0.7 trillion) and China, with about half distributed in manufacturing. According to EU estimates, EU investment in the US supports approximately 3.4 million American jobs. Additionally, the EU is an important market for US services. Although the Eurozone has a large goods trade surplus with the US, it simultaneously has a large services deficit, resulting in a relatively balanced overall trade structure, and services are precisely the area that the Anti-Coercion Instrument (ACI) can target. However, the flip side of close ties means that the EU has significant shortcomings in the current geopolitical context that transcends "economic calculation." Europe is highly dependent on the US in key areas such as defense, finance, technology, and energy, which also means that countermeasures, including the ACI, face significant limitations. At the defense level, according to the SIPRI database, on average from 2020-2024, over 60% of imports came from the US, with the proportion of imports from the US exceeding 80% in the Netherlands, Italy, Norway, etc. At the financial level, Europe also relies on the US for basic financial infrastructure. For example, in card payments, a primary electronic payment method, international card networks accounted for about 61% of eurozone card transaction volume in 2022 (predominantly US-based). In cross-regional clearing, Visa and Mastercard hold a combined market share of over 99% in Europe. Furthermore, according to ECB surveys, the domestic market share of EU card providers is still declining. At the technology level, Europe lacks large technology companies and relies on major US firms in related fields such as software, hardware, cybersecurity, and data centers. According to a study by the French large enterprise digital association (CIGREF), 80% of total European expenditure on professional-use software and cloud services flows to US companies. At the energy level, after the Russia-Ukraine conflict, while the EU reduced its energy dependence on Russia, it simultaneously increased its dependence on US energy (and defense). Data from the Institute for Energy Economics and Financial Analysis (IEEFA) shows that about 57% of Europe's LNG imports in 2025 came from the US, and it is projected that if the US-EU trade agreement develops as planned, Europe's dependence on the US for LNG imports could increase to 80% by 2030. Additionally, serious internal political divisions within the EU increase the difficulty of formulating a common response. Significant differences in attitudes towards this tariff issue exist among different European countries and even among different political parties within the same country, complicating the rapid implementation of countermeasures. Potential Impact on the European Economy and Markets: Economically, CICC believes that tariff escalation of a similar magnitude will have a limited impact on GDP. Unlike in April 2025, European consumer confidence has already decreased compared to 2024 due to the April tariffs, the savings rate remains high, and investment data remains relatively subdued due to structural factors. This year's European economic recovery is primarily driven by domestic demand. At the policy level, CICC expects that if trade friction does not escalate significantly, the ECB will likely remain on hold. Services inflation is the main support for current inflation, while potential tariff increases primarily exert downward pressure on goods inflation. The biggest upside risk is supply-side inflation caused by supply chain shocks in the event of a significant escalation of trade friction. Regarding fiscal aspects, CICC maintains its view that this year's European fiscal space primarily comes from Germany, while France, due to a domestic political impasse that is temporarily difficult to break, has limited fiscal space. It is worth watching whether new geopolitical changes will catalyze fiscal actions. Regardless of the final negotiation outcome, CICC believes that recent events will further strengthen Europe's determination for "strategic autonomy." Germany's unexpectedly strong fiscal shift in Q1 2025 and the EU's "Re-armament of Europe" plan, launched in a similar context, are examples. Since Germany, which had the most space, has already shifted, the other four major EU countries (France, Italy, Spain) do not have significant fiscal space, making the EU as a whole possibly the only entity with remaining fiscal capacity. However, EU-led fiscal efforts face real constraints from rising support for far-right parties and historical wariness among major member states towards debt mutualization. One possible direction is for the EU to take more measures based on the "greatest common denominator" among member states, specifically strengthening EU strategic autonomy, including discussions on changes to Europe's structural investment focus in areas like defense (e.g., the EU has already passed €150 billion in own resources to support member states' defense loans), technology, infrastructure, and finance. Regarding market impact, firstly, CICC does not believe Europe will engage in large-scale selling of US assets in the short term due to this event. Combined, the EU and the UK are the largest foreign investors in the US equity and bond markets. As of 2024, Europe held about 9% of US stocks (48% of foreign holdings), and the EU and UK combined held about 8% of US Treasury bonds (31% of all foreign holdings). However, CICC believes it is unlikely that Europe will "weaponize" its financial investments in the US. Firstly, such a move would have too great an impact on its own existing holdings (e.g., how to find another buyer of sufficient scale). Secondly, most European dollar assets are held by private investment institutions or individuals, making it difficult to operate under existing legal procedures. Simultaneously, the US is also the largest foreign holder of euro-denominated assets, and Europe's past financial dependence on the US means that the stability of the US financial system is closely linked to Europe's financial stability. In the medium term, this event may further prompt Europe to reconsider the sustainability of its current asset allocation. Currently, according to EPFR data, developed Europe's allocation to US assets is higher than its allocation to assets within Europe itself. In the short term, regarding asset impact, for the euro, on one hand, tariffs and geopolitical friction may further weaken Europe's economic growth, negatively affecting the euro; on the other hand, the recent rise in US policy uncertainty may cast more doubt on the reliability of the US as an investment destination, thereby negatively impacting the US dollar. The market's trading contradiction in this trade friction may be more concentrated on the latter. From an equity market perspective, based on the proportion of sales exposure to the US (although not necessarily equivalent to having the highest exports to the US), European sectors such as biopharmaceuticals, media & entertainment, and food & beverages may face some pressure. In terms of absolute export value, exports of pharmaceuticals, transport equipment, machinery, chemicals, aircraft, etc., to the US are relatively high. Although companies might respond by adjusting supply chains or localizing production, this still introduces uncertainty to the profit recovery of "Global Europe." Against this backdrop, CICC is relatively more optimistic about: (1) domestically-oriented sectors aligned with the "strategic autonomy" theme (e.g., banks, utilities); (2) regarding external demand exposure, CICC suggests focusing on sectors where valuations and earnings expectations are already relatively reasonable and which face relatively smaller policy headwinds.
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