For decades, America's trade relationship with China dominated political discourse about deficits, tariffs, and fair trade. But a remarkable shift has occurred, one that could reshape global commerce: for the first time in recent memory, the United States' largest trade deficit is no longer with China—it's with the European Union.

The numbers are striking. During the first 10 months of 2025, America's trade deficit with the EU reached approximately $190 billion. With China, it was $175 billion. While China's surplus with the United States has shrunk by 28% during this period, Europe's has remained stubbornly stable.

This shift has not escaped notice in Washington—and the implications for investors, businesses, and the transatlantic relationship could be severe.

How the Deficit Shifted

The change reflects two converging trends. First, Trump administration tariffs on Chinese goods, maintained and expanded across two terms, have meaningfully reduced Chinese exports to America. Reshoring initiatives, supply chain diversification, and "friend-shoring" to allied nations have redirected trade flows.

Second, European exports to America have proven remarkably resilient. German automobiles, French luxury goods, Italian machinery, and Dutch technology equipment continue to flow across the Atlantic largely unimpeded by the tariffs applied to China.

The result is a politically inconvenient reality: the administration's signature trade policy has reduced the China deficit while leaving Europe untouched—creating a new target for protectionist rhetoric.

The Tariff Threat

The Trump administration has already signaled concern. Steel and aluminum tariffs of 50% apply to European producers, recently extended to cover more than 400 products containing these metals. But the threat goes further.

A proposed trade agreement would see the EU cut its tariffs on US goods to 0% while EU exports face 15% tariffs in the US. This asymmetric arrangement reflects Washington's leverage—Europe needs American security guarantees and market access more than America needs European goods, at least in the administration's calculus.

"Rising Trade Deficit Could See Trump Punish Europe in 2026. The US trade deficit with the EU has now surpassed China's for the first time in memory. This is politically significant and likely to prompt retaliation."

— Foreign Policy analysis

The Section 301 investigation process, used extensively against China, could provide legal justification for expanded tariffs on European goods. The administration is expected to finalize a comprehensive report by mid-2026 that could authorize tariff rates of 30% or higher on broad categories of European imports.

Europe's Strategic Response

European policymakers are not passive observers. The EU-Mercosur trade deal, finalized just days ago after 25 years of negotiations, represents a deliberate diversification strategy. By securing preferential access to South American markets and critical minerals, Europe reduces its exposure to potential American protectionism.

The EU is also strengthening ties with Indo-Pacific nations, negotiating trade agreements with Australia, India, and ASEAN members. The strategy is clear: if America retreats from free trade, Europe will find alternative partners.

But Europe's options are constrained. The American market remains essential for European exporters. German automakers earn significant profits from US sales. French luxury brands depend on American consumers. Any serious trade war would inflict substantial damage on European economies already struggling with structural challenges.

The Greenland Complication

Geopolitical tensions add another layer of complexity. Trump administration officials have repeatedly expressed interest in acquiring or annexing Greenland, an autonomous territory of Denmark. These statements have created diplomatic friction that could spill into trade negotiations.

A senior European Parliament member recently warned that Trump's Greenland threats "put EU-US trade deal in jeopardy." The linkage of territorial ambitions with commercial policy represents an unprecedented complication in transatlantic relations.

Sector-by-Sector Impact

Potential European tariffs would not affect all sectors equally:

  • Automotive: German luxury carmakers face the greatest exposure. BMW, Mercedes-Benz, and Volkswagen operate US manufacturing facilities but still import significant vehicle volumes
  • Luxury Goods: LVMH, Kering, and Hermès generate substantial US revenue that would be threatened by tariffs or retaliatory consumer boycotts
  • Industrial Equipment: Siemens, ABB, and Schneider Electric could face margin compression from tariff costs
  • Agriculture: European wine, cheese, and specialty foods already face elevated tariffs; further increases could devastate small producers

Investment Implications

For investors, the transatlantic trade tension creates both risks and opportunities:

  • European Exporters: Companies with heavy US exposure face valuation pressure; consider reducing positions in DAX exporters
  • US Companies with European Operations: American multinationals manufacturing in Europe for US import could benefit from tariff arbitrage
  • Currency Effects: Trade tensions typically strengthen the dollar against the euro, benefiting US investors with unhedged European positions on repatriation but hurting near-term returns
  • Defense Stocks: European defense spending is accelerating partly in response to strained US relations; Rheinmetall, BAE Systems, and similar companies may benefit

The Year Ahead

Analysts paint a sobering picture for EU-US relations in 2026. One European think tank bluntly assessed: "2025 was the most turbulent year for European-US relations since 1776. 2026 will be worse."

The prediction centers on the "Turnberry agreement"—the proposed trade deal that would create asymmetric tariffs favoring the US. In July 2026, Washington will conduct a one-year review of European compliance with investment and energy commitments. Analysts expect the review to find shortfalls, providing justification for restrictive measures.

For the first time since World War II, Europe and America may find themselves in a genuine economic confrontation. The $190 billion deficit provides the political ammunition. The question is whether cooler heads will prevail—or whether the transatlantic relationship faces its most serious test in generations.

The Verdict

The shift in America's largest trade deficit from China to Europe represents a historic inflection point. Investors who assumed transatlantic commerce was immune to tariff risks must recalibrate their assumptions.

The prudent approach is defensive: reduce exposure to European exporters dependent on US markets, hedge currency risk, and monitor political developments closely. The EU-Mercosur deal shows Europe preparing for the worst. Investors should consider doing the same.

The next chapter of global trade war may not be fought across the Pacific. It may be fought across the Atlantic—between allies who have never truly been adversaries. Until now.