Will European business turn away from America?
Trump’s tariffs are making China look more attractive
If the European Union was, as Donald Trump claims, formed “to screw the United States", nobody told its companies. The stock of foreign direct investment in America held by EU businesses reached more than $2trn in 2023, accounting for nearly two-fifths of the country’s total, up from a third a decade before. That is far more than from any other source. European companies employ around 3.5m people in America, more than American ones do in the bloc. Germany’s car-industry association says its members have 140,000 workers across 2,000 factories in America, producing 900,000 vehicles a year.
Nevertheless, European companies have found themselves in the sights of America’s president, who is irked by the fact that his country imports more goods from the EU than it exports (and ignores the fact that the opposite is true for services). On May 23rd Mr Trump threatened to impose a 50% tariff on European wares from June 1st. Since then, a flurry of diplomacy has led to a reprieve, and a court in America has thrown Mr Trump’s tariff-setting powers into doubt. But the uncertainty is enough to make European bosses take a hard look at their exposure to the country.
Based on figures from Morgan Stanley, a bank, companies listed in the EU rely on America for almost a fifth of their sales on average (see chart). For companies such as EssilorLuxottica, a Franco-Italian maker of spectacles, and Novo Nordisk, a Danish manufacturer of weight-loss drugs, the share is much greater. Even European firms that produce in America often rely on inputs from abroad. As America threatens to become a more costly and volatile place to do business, some may be tempted to shift their attention to another market that has lately fallen out of favour: China. Should they?
European companies have poured money into America in recent years, attracted by the spritely growth of its economy and, for some industries, the generous subsidies introduced by the Biden administration. At the same time, many European firms have dialled down their investments in China in response to slowing growth, fierce competition from domestic rivals and concerns over the country’s increasingly fractious relations with the EU. Over the past few years, the share of listed EU companies’ sales generated in China has stalled at below a tenth, while the portion from America has gradually ticked upwards.
Redirected
Now some European businesses are rethinking their westward turn. Although a few, such as Sanofi, a French pharma giant, and Siemens, a German machinery-maker, have announced big investments to boost production in America, many others are being put off by Mr Trump’s chaotic policymaking. In a recent survey by Germany’s Chamber of Commerce and Industry, 24% of companies said they were planning to increase their investments in America, whereas 29% said they were planning to reduce them.
“The uncertainty is making big strategic decisions very tricky," says Alexander Lacik, boss of Pandora, the world’s largest jewellery-maker by volume. Around 30% of the Danish company’s sales come from America. Most of its production is not in Europe but Thailand. Pandora also ships wares destined for Canada and Latin America to its distribution centre in Baltimore, which it may stop doing as a result of American tariffs. The boss of a Dutch multinational company likewise laments the volatility of America’s trade policies. Every new tariff announcement has potentially big ramifications for its supply chain and pricing.
Meanwhile, some European companies are turning their gaze back eastward. “There is an appetite among European business leaders for re-engagement in China," says Max Zenglein of MERICS, a think-tank based in Berlin. Volkswagen, Europe’s biggest carmaker, is one company that is eager to reverse its deteriorating position in the market. At the Shanghai auto show in April it announced that it would launch 11 models exclusively for China, including six electric vehicles and two plug-in hybrids. It has set itself a target of selling 4m cars in China annually by 2030, up from 2.9m in 2024—a difficult task, given that its sales there shrank by nearly 10% last year.
Despite recent efforts by China’s leaders to court European bosses, the country remains a tricky place for eu companies to operate in. European firms still face significant barriersto investment, procurement and data handling, says Mr Zenglein. In a survey conducted earlier this year by the EU Chamber of Commerce in China, 73% of companies said that doing business there had become more difficult over the past year.
“China’s charm offensive—no matter how timely given Trump’s aggression against the EU—should be ignored," argues Alicia García Herrero of Natixis, an investment bank. Profit margins are razor thin, foreign companies are at a disadvantage and anyone hoping to transfer technology from China to Europe will do so in vain, cautions Ms García Herrero.
Not all European firms will place the same bets. China is the world’s largest market for cars and machine tools; America is the biggest for apparel and drugs. Exposure to the two superpowers already varies significantly across European countries. America accounts for 42% of the sales of listed Dutch firms, according to Morgan Stanley, compared with just 8% for Italian ones. German companies generate 13% of their revenue in China, whereas Spanish ones make just 2% of theirs in the country.
What is more, America and China are not the only options available to European businesses. Jacob Aarup-Andersen, chief executive of Carlsberg, a Danish brewer, says that although his company plans to continue investing in China, which makes up a fifth of its sales, it is also increasing its efforts to grow in other markets such as India and Vietnam. There is, after all, a world beyond the rival superpowers.
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