Global trade: The EU increasingly caught between the US and China

After the outcome of the US elections, relations between the USA and China will remain tense and world trade will continue to fragment. We predict that the EU will be increasingly caught between the USA and China. Belgium's small, open and export-oriented economy is also threatened by the impact of a trade war.

Although global trade remains strongly tied to the US economy, China has emerged as a new superpower, capitalizing on its key role in global manufacturing and the size and growth of its domestic market. Against this backdrop, growing tensions between the USA and China are reshaping global supply chains and paving the way for new trading powers.

According to the European Commission, the Belgian economy will grow faster than that of its main neighbors in the coming years. On the other hand, two major Belgian banks predict only 0.6% growth in 2025 due to President-elect Donald Trump's planned import tax. In either case, Belgium, as a small, open, export-oriented economy, remains heavily dependent on its export opportunities.

Johan Geeroms, our Director Risk Underwriting Benelux: "In our previous scenario, before the US election, cumulative export earnings for Belgium in 2025-2026 were expected to amount to USD 67 billion. However, with the likely limited trade war, we now expect them to be USD 2.6 billion lower at USD 64.4 billion. In an extreme scenario of all-out trade war, Belgium's export earnings over the period 2025-2026 would fall to 58.4 billion USD, 8.6 billion USD less than our previous estimate. This would also immediately mean a loss of jobs and an even greater budget deficit."

In his second term as US President, Donald Trump is likely to raise tariffs on Chinese and other strategic imports (to 25% for the former and 5% for the rest of the world, excluding Mexico and Canada), which would reduce nominal world trade growth by -0.6 percentage points in 2026, as most measures would come into effect from the second half of 2025. China and the EU would bear the brunt of the cost, with $67 billion worth of exports threatened in 2025-2026, particularly in the automotive, transport equipment and metals sectors. Chinese and European retaliatory measures are expected to affect US products such as pharmaceuticals, automobiles, metals, agri-food and machinery.

"In the event of an all-out trade war (tariffs of 60% on China and 10% on the rest of the world, including Mexico and Canada), the toll would amount to 2.4 percentage points of nominal world trade growth. China, Mexico and Canada would be hardest hit, with cumulative export losses amounting to almost $217 billion in 2025-2026. But this scenario seems unlikely, as the US would also face a significant economic cost," adds Ana Boata, our Head of Economic Research.

World trade is increasingly shaped by the competing geo-economic agendas of the USA and China. American imports have turned away from China, while the latter is exporting more to its own geopolitically close partners (Russia, Singapore, Vietnam, United Arab Emirates, Saudi Arabia). Against this backdrop, bilateral trade between geopolitically aligned countries has risen by 2 percentage points ($620 billion) to 60% of world trade in just two years.

"China's "silk" doctrine, centered on trade and industry, has relied primarily on "soft power" and connective influence, while the United States behaves like a "godfather" by relying on four pillars:

1. an unwavering commitment to protecting core national interests at all costs, 
2. securing loyalty within the network of historic allies, 
3. an active economic and military strategy against rivals, and 
4. the expansion of American influence and control in new areas such as space, technology and artificial intelligence. 

No matter who won the US elections, this confrontation would have been destined to last," explains Ano Kuhanathan, our Head of Sector Research.

While the USA and the EU share a common position on geopolitical issues, their economic interests are not aligned. Nevertheless, the EU tends to follow the US when it imposes tariffs on China - usually the following year. While past tariffs imposed on China cost the US $17 billion a year (4% of its Chinese imports), they cost the EU almost $38 billion a year (6.4% of its Chinese imports). Moreover, the EU itself is not immune to US protectionist measures, and there is a risk that the US and/or China will follow a divide-and-conquer strategy, exploiting Europe's internal divisions to seek bilateral agreements that would improve their own negotiating positions vis-à-vis the bloc.

By examining "Next Generation" trade hubs and the geopolitical, trade and cross-border investment links of other major economies with the USA and China, we calculated geo-economic distance scores in relation to the two countries. These scores show that China's sphere of influence includes more "Next Generation" trade hubs from the emerging world, while most of the Western bloc remains closer to the USA.

Unsurprisingly, the UK is the country closest to the USA, followed by Ireland and the Netherlands, with Canada in 4th place and Mexico in 28th. Most African and Asian countries are closer to China: on average 0.5 for African countries versus 0.7 for the USA, and 0.4 for Asian countries versus 0.6 for the USA. But after Hong Kong, Canada is the second closest economy to China, managing to stay close to both superpowers.

"Australia, South Korea and Greece are among the other countries that have managed to maintain the same distance from the USA and China. These countries are geopolitically closer to the United States, but maintain very strong trade and investment relations with China. This position could become increasingly uncomfortable and force them to choose sides, should the new geo-economic order centered on the confrontation between the USA and China deteriorate significantly", explains Françoise Huang.