Trump International: DM Countries
Much uncertainty still exists on policy but in 2025 the EU will likely be under pressure from targeted new tariffs by the Trump administration, while also being asked to spend more on defense spending. Purchasing extra LNG and military hardware from the U.S. is one way towards a potential trade deal by H2 2025/H1 2026 – though the complexity of dealing with the EU will ensure that this is not quick. The UK and Australia will likely be treated differently due to defense commitments alongside the U.S. in Asia. Meanwhile, Japan/Canada will be under pressure as well to speed up planned military spending increases and fine tune the 2019 trade deals.
The incoming Trump administration international agenda will focus on tariffs and trade deals, plus deescalating wars/getting partners to spend more on defense spending. This will be dictated by the U.S. more than the DM partners. What are our initial thoughts so far?
Figure 1: Key DM Country Metrics (%)
| U.S. Trade position (Jan-Sep 24) USD Blns | Defence spending pct GDP | Right Wing government | |
| EU | -173 | 1.9 | No |
| Germany | -64 | 1.5 | No |
| France | -12 | 2.1 | No |
| Italy | -33 | 1.6 | Yes |
| UK | 8 | 2.3 | No |
| Japan | -50 | 1.2 | Centre |
| Australia | 15 | 1.9 | No |
| Canada | -46 | 1.3 | No |
Source BEA/IISS 2024/Continuum Economics
We have some initial thoughts on how key DM countries could be approached by the incoming Trump administration. However, uncertainty exists on these initial baselines, due to differences of opinion on the pace and breadth of tariff increases and how much geopolitical threat exists from certain countries. Even so, the focus will shift to bilateral discussions rather than multilateralism. We shall regularly update our baseline views on new information from the Trump administration in late 2024 and H1 2025. Our December Outlook will also include analysis on the economic and market impact of likely Trump administration policies. However, it is worth noting that even if bilateral trade deal were to reduce U.S. deficits with one country, that the overall trade deficit is a function of aggregate demand and supply and tax cuts could fuel demand more than tariffs prompt import substitution.
Strategically, President elect Trump international strategy is twofold. Firstly, use tariffs to get trade deals that are favorable to the U.S., which he has been consistent about for decades – though most do not like his tactics. Secondly, deescalate wars/get countries to spend more on defense.
The EU will likely be in focus on both dimensions. Trump has voiced frustration before with Germany, EU and the European car industry on the trade front and tariff threats will likely be seen in H1 2025. We would feel that targeted tariffs by industry and country will likely be used as a negotiating tool rather than a quick introduction of a universal 10-20% tariff. Additionally, France has only a small trade surplus with the U.S., but has good defense spending and plans to send an aircraft carrier group to Asia in 2025 – important for the China hawks in the Trump administration. Poland also significantly exceeds 2.0% for defense spending and has only a tiny surplus with the U.S. Meanwhile, Ireland also has a similar sized trade surplus with the U.S. as Germany due to U.S. multinationals based in Ireland and could see the Trump administration try to onshore revenue and jobs.
EU countries are in transition to higher defense spending, but the Trump administration will likely pressure for quicker and more concrete commitments of 2% of GDP on defense from Germany, Italy and Spain. This could actually lead to increased military spending on U.S. hardware, which combined with more commitments on U.S. LNG purchases could help move the U.S. and EU towards a trade deal in H2 2025. However, internal divisions within the EU means that this will not be quick and is not guaranteed. The outcome of the German election is key, but we feel will likely see a grand coalition that relaxes the debt brake and has an increased and clearer commitment to defense spending. This is also interrelated to the Ukraine war and whether the EU feels accepting of any peace deal or feels abandoned by the U.S. Ukraine and Russia are obviously crucial and we will provide a deeper scenario analysis next week, but we feel that the U.S. administration will not be soft on Russia for fear it could show Donald Trump as weak – China hawks will warn Donald Trump that this risks China trade negotiations.
The UK is different from the EU in defense spending, but also crucially permanently having warships based in Asia and being open to the U.S. tilt towards Asia (here) and coordination with U.S./Australia under AUKUS. This will be important for China hawks in the Trump administration including Marco Rubio and Mike Waltz. The UK also has a trade deficit with the U.S., which means it may not face the same tariffs as the EU. However, a major U.S./UK trade deal remains unlikely, given large differences over agriculture and the UK economy could be caught in the crossfire should there be a more material quarrel between the U.S and the EU.
For Japan and Australia, the Trump administration desire to restrain China trade and structural rise, will see support from the U.S. for these countries. However, Japan could face U.S. pressure to go beyond the rapid buildup of defense spending to 2% in 2027 (here) and also enhancing the 2019 U.S./Japan trade agreement (here).
For Canada, the USMCA trade agreement is due for renewal in 2026 and the Trump team are concerned about Chinese companies increasing production to reexport to the U.S. This will likely see U.S. demands for increased production share of goods from U.S./Mexico and Canada via tighter rules of origin rules. Additionally, the Trump team will likely put pressure on meeting and potentially exceeding a 2% defense spend much earlier than the 2032 target date of the Trudeau government.