Zhongjin: European and American trade relations under geopolitical disputes.

CICC released a research report stating that on January 17th, Trump announced a 10% tariff on 8 European countries, to be implemented from February 1st. At the same time, he declared that the tariff rate would increase to 25% starting from June 1st, until an agreement is reached on the US "comprehensive and thorough purchase of Greenland." In the short term, in terms of asset impact, for the euro, on the one hand, tariffs and geopolitical frictions may further weaken Europe's economic growth, bearish for the euro; on the other hand, the recent increase in uncertainty in US policy may raise questions about the reliability of the US as an investment destination, bearish for the dollar. The contradictions in market trading in this trade friction may be more concentrated on the latter. CICC's main points are as follows: Latest developments in EU-US tariff disputes: On January 17, 2026, Trump announced a 10% tariff on 8 European countries, to be implemented from February 1st. At the same time, he declared that the tariff rate would increase to 25% starting from June 1st, until an agreement is reached on the US "comprehensive and thorough purchase of Greenland." The 8 European countries involved include: Denmark, Norway, Sweden, France, Germany, UK, Netherlands, and Finland, of which 6 are EU member states (excluding UK and Norway). Trump stated on Wednesday that following negotiations with the NATO Secretary-General, tariffs on a series of European countries originally scheduled to be imposed on February 1st will no longer be levied. There is still considerable uncertainty regarding changes in subsequent matters and the response from Europe. Prior to this, the EU's trade agreement stipulated that in addition to the highest tariff rate applicable to most goods exported from the EU to the US being 15%, the EU also promised to increase investment in the US, purchase American energy products and chips, cancel tariffs on industrial products from the US, and reduce non-tariff barriers to trade in food and Shenzhen Agricultural Power Group. Strengths and weaknesses of the EU: From the perspective of trade volume and structure, investment scale, employment, etc., the economic ties between the US and Europe are close and provide multiple leverage points. The EU and the US have the largest bilateral trade and investment relationship in the world, with the EU having the highest share of the US export area, accounting for 17% of total US exports in February 2025, higher than China (6%), ASEAN (6%), and Japan (4%). At the same time, the EU is also the largest source of FDI in the US, with the EU's direct investment stock in the US reaching $2.4 trillion in 2023, higher than Japan ($0.7 trillion) and China, with around half of it concentrated in the manufacturing sector. According to EU calculations, EU investment in the US supports approximately 3.4 million jobs. Additionally, the EU is also an important market for the US services sector. Although the Eurozone has a large trade surplus with the US in goods, it also has a significant trade deficit in services, with the overall trade structure in a relatively balanced state, and services are an area that the Anti-Counterfeiting Initiative (ACI) can target. However, the close ties also mean that the EU has clear weaknesses beyond "economic calculation" in the current geopolitical context. Europe is highly dependent on the US in key areas such as defense, finance, technology, and energy, which also means that there are significant limitations on countermeasures including the ACI. In terms of defense, according to SIPRI data, an average of over 60% of imports from the US, with countries like the Netherlands, Italy, and Norway importing over 80% of their goods from the US. On the financial front, Europe also relies on the US for basic financial infrastructure. For example, in bank card payments, which are the main electronic payment method, international bank card organizations accounted for about 61% of the Eurozone's card transactions in 2022 (primarily the US), and in cross-border settlements, Visa and Mastercard hold a market share of over 99% in Europe. According to the European Central Bank's survey, the domestic market share of EU bank card providers is still decreasing. In terms of technology, Europe lacks large tech companies and relies on major US companies in software, hardware, network security, and data center-related areas. According to a study by the French Association for Large Enterprise Digitalization (CIGREF), 80% of European expenditure on specialized software and cloud services flows to US companies. In terms of energy, following the Russia-Ukraine conflict, the EU has reduced its energy dependence on Russia but at the same time increased its reliance on US energy (as well as defense). Data from the Institute for Energy Economics and Financial Analysis (IEEFA) shows that around 57% of LNG imports in Europe will come from the US by 2025, and it is estimated that if US-EU trade agreements develop, Europe's dependency on US LNG imports could increase to 80% by 2030. Additionally, there is significant political fragmentation within the EU, which complicates the adoption of common measures to address these issues. Different countries within Europe and different political parties within the same country have varying attitudes towards the tariff issue, making it difficult to quickly implement countermeasures. Potential impact on European economy and markets: Economically, CICC believes that a similar level of tariff escalation will have a limited impact on GDP. Unlike in April 2025, consumer confidence in Europe has already declined since April due to tariffs, savings rates remain high, and investment data is still subdued due to structural factors. Economic recovery in Europe this year will mainly rely on domestic demand. On the policy front, CICC expects that the European Central Bank may remain unchanged in the event of limited escalation in trade friction. Service inflation is the main support for existing inflation, and potential additional tariffs may exert downward pressure on commodity inflation. The biggest upside risk would be significant escalation of trade friction leading to supply-side inflation due to disruptions in the supply chain. In terms of fiscal policy, CICC maintains that Germany will be the main source of fiscal space this year, as France is currently facing domestic political deadlock and has limited fiscal space. Closely monitor whether new geopolitical changes will catalyze fiscal adjustments. Regardless of the final negotiation outcome, CICC believes that the recent developments will further strengthen Europe's determination for "strategic independence." Germany's unexpected fiscal shift in the first quarter of 2025 and the launch of the EU's "Rearm Europe" plan are similar to the current backdrop. Since Germany, which has the most fiscal space, has already shifted, the other four major EU countries (France, Italy, Spain) do not have much fiscal space. The EU as a whole may be the only entity with fiscal space, but EU fiscal policy is constrained by the rise of far-right parties and the historical caution towards debt sharing among major member states. One possible development is for the EU to take more measures on the "maximum common denominator" in each member country, strengthening aspects of EU strategic independence, including defense (such as the EU's support for member countries' defense loans with 1.5 trillion Euros), technology, infrastructure, and finance, changing the main focus of European structural investments. In terms of market impact, CICC does not believe that Europe will engage in large-scale selling of US assets in the short term due to this incident. The EU and the UK are the largest foreign investors in the US equity and bond markets, with Europe holding approximately 9% of US stocks (48% of foreign holdings) and the EU and UK collectively holding about 8% of US bonds (31% of total foreign holdings) as of 2024. However, CICC believes that the likelihood of Europe "weaponizing" its financial investments in the US is small. This is partly because the impact on their existing positions would be too great (such as finding another buyer of sufficient volume), and because most European US dollar assets are held by private investment institutions or individuals, making it difficult to operate within existing legal procedures. Additionally, the US is also the largest overseas holder of euro assets, and Europe's past dependence on the US in financial matters means that US financial stability is closely related to European financial stability. In the medium term, this incident may further prompt Europe to consider the sustainability of its current asset allocation. According to data from EPFR, developed Europe's allocation of assets in the US is higher than on its own territory. In the short term, in terms of asset impact, for the euro, on the one hand, tariffs and geopolitical frictions may further weaken Europe's economic growth, bearish for the euro; on the other hand, the recent increase in uncertainty in US policy may raise questions about the reliability of the US as an investment destination, bearish for the dollar. The contradictions in market trading in this trade friction may be more concentrated on the latter. From the perspective of equity markets, in terms of the proportion of exposure to US sales (although not necessarily equivalent to the largest exports to the US), European biopharmaceuticals, media and entertainment, and food and beverage sectors may face some pressure. In terms of absolute export value, exports to the US are high for pharmaceuticals, transport equipment, machinery, chemicals, airplanes, etc. Although companies can cope by adjusting industrial chains, localizing production, etc., this uncertainty still poses challenges to the profit recovery of the "global Europe." Against this backdrop, CICC relatively favors: (1) domestically focused industries under the theme of "strategic independence" (such as banks, utilities); (2) in terms of external exposure, CICC recommends focusing on sectors where valuations and profit expectations are already reasonable, and sectors with relatively small policy headwinds.