Why Trump Can’t Afford a Trade War with EU?

Just one day after threatening a massive tariff hike on European goods, President Trump made a sudden and unexpected U-turn. What happened behind the scenes? The answer may surprise you.

U.S. President Donald Trump recently threatened to impose a 50% tariff on EU goods starting June 1. Yet just one day after a call with European Commission President Ursula von der Leyen, he agreed to postpone the measure and extend trade talks until July 9. During this period, the tariff increase will be put on hold.

The announcement sparked optimism among investors. European stocks surged on Monday, U.S. markets were closed for the holiday, but U.S. equity futures jumped across the board. Gold, a traditional safe haven, declined in response.

So why did Trump back down so quickly? The reason is simple: the cost of a failed negotiation with the EU is something the U.S. cannot afford.

EU-U.S. Trade Ties Too Big to Break

Let’s look at the numbers. If viewed as a single entity, the EU is the United States’ largest trading partner. The two sides conduct over €900 billion in annual goods trade and more than €500 billion in services trade, totaling approximately €1.5 trillion (around $1.7 trillion) per year.

In goods trade, the EU runs a surplus of about €150 billion annually with the U.S. Conversely, in services trade, the U.S. enjoys a surplus of about €100 billion. These figures cannot be viewed in isolation—if a tariff war erupts in goods, the EU will likely seek compensation through services.

EU Retaliation: Tech Giants First in the Crosshairs

Given the EU’s goods surplus, any retaliation against the U.S. would likely target services—particularly the American tech giants, often referred to as the "Magnificent Seven." Trump has complained about EU fines on these firms, but so far, Brussels has barely flexed its muscles.

The EU could impose direct taxes on digital revenues earned by U.S. tech companies operating in Europe. France has already implemented a “GAFA tax” (targeting Google, Apple, Facebook, and Amazon's ad revenue), collecting over €500 million per year.

Italy and Spain have introduced similar taxes. If the entire EU aligns on this policy, the financial impact on American tech profits would be substantial. Ultimately, U.S. tech giants—not Trump—would bear the burden of tariffs.

The EU could also escalate with heavier regulation and larger fines. It’s no secret Brussels sees American tech as a cash cow. On April 23, the EU fined Meta €200 million and Apple €500 million for violating the Digital Markets Act. A pending decision on Alphabet could result in a record-breaking penalty—especially if it coincides with a transatlantic trade conflict.

The EU's Digital Services Act, a sister law to the Digital Markets Act, will provide another channel for fines.

Europe Strikes at Data—the Core of U.S. Tech Power

Beyond fines, the EU is gradually targeting the most valuable resource held by American tech giants: personal data.

Currently, vast amounts of European data are stored and processed by U.S. firms—Google, Amazon, Meta, and Microsoft dominate Europe’s digital infrastructure via cloud services, social media, and search platforms. This reliance reflects a degree of trust in the U.S., but Trump’s recent stance is prompting a shift in Europe’s outlook.

Some countries have already begun reconsidering their dependence on American tech. The EU is preparing a new set of cloud computing regulations that may enforce strict data localization policies—requiring certain sensitive data to be stored and processed within EU borders. Trump’s threat ironically gives Brussels a stronger rationale for accelerating these moves.

We may soon see regulations mandating that all data—especially in sectors like healthcare, finance, and government—must be housed within the EU. A certified European data center network may be developed to prevent U.S. intelligence from accessing this information.

Europe Already Taking Digital Decoupling Steps

At the government level, Germany and France are leading a push for digital decoupling. The German federal government is moving public service data off Amazon Cloud. Both France and Germany are phasing out Google Workspace in favor of local alternatives. Germany is also developing a government collaboration platform to replace Microsoft Teams.

Complementing this are efforts to promote European cloud platforms such as OVHcloud and Deutsche Telekom Cloud, resist closed American systems, and encourage open-source alternatives. Meanwhile, the EU is investing heavily in key technologies like semiconductors, AI, and quantum computing to reduce dependency on U.S. chipmakers like Nvidia and Intel.

Keep in mind: the most valuable asset for U.S. tech firms is their vast data troves. If Europe proceeds with this decoupling, it could strip them of access to the personal data of 500 million affluent Europeans. This "digital decoupling" won't happen overnight—but its gradual progress threatens the long-term growth logic of American tech giants.

Broader Financial and Defense Implications

Beyond tech, the EU has other ways to pressure U.S. firms, especially in finance. EU regulators are already investigating Mastercard and Visa for monopolistic practices in Europe’s payments market. Brussels could also force foreign banks and asset managers to provide more capital to support their EU operations.

If taken further, this could severely hit U.S. financial stocks.

On the defense front, don’t forget that Europe plays a significant role in the U.S. defense supply chain. Around 25% of the F-35 fighter jet’s components are produced in Europe. If Europe pursues defense localization, it would impact not just American defense contractors but also the Pentagon’s operations.

The EU’s Ultimate Weapon: Financial "Nuclear Option"

The EU also possesses some nuclear-grade tools—so powerful that they may never be used. One such tool is SWIFT, the global payment network headquartered in Belgium, with operations and critical infrastructure based in Europe. European regulators hold significant sway over SWIFT. If access for U.S. banks were restricted, the result could be a global financial meltdown.

Though the actual likelihood of deploying such a “nuclear option” is low, its mere existence exerts strategic deterrence. As with nuclear weapons, their power lies in their presence on the launchpad.

Conclusion: EU Holds More Cards Than Expected

In short, a full-scale EU retaliation would be devastating—likely beyond what the U.S. could absorb. The most probable outcome is that both sides will compromise and reach a trade agreement. From the current dynamics, the EU may actually hold the upper hand at the negotiating table, potentially forcing the U.S. to concede more.