What does breaking ties with Europe mean for the US economy?

European leaders, many of whom are gathering in Davos, Switzerland, this week for the World Economic Forum, are considering the bloc Response optionsThat includes imposing tariffs on more than $100 billion of American goods and making it more difficult for American multinationals to bid on European contracts. there will be a trade war disastrous for Europewho is already suffering steady progress.

Economists say the tit-for-tat tariffs probably won’t cause a recession in the US, but could slow growth, hit an already sluggish domestic manufacturing sector and raise prices for consumers and businesses at a time when the US is already struggling to get inflation back to comfortable levels.

In the long run, deteriorating relations could lead Europe to reduce its dependence on the US and deepen trade ties elsewhere, undermining a relationship that has been a driver of prosperity on both sides of the Atlantic.

For the US, the end result could be US companies selling less to Europe, reducing their profits and opening the door to competitors from countries like China, said Mary Lovely, senior fellow at the Peterson Institute for International Economics, a think tank. “Once those new relationships are formed, they are very hard to change,” she said.

The economies of America and Europe are deeply interconnected. The EU is the US’s largest trading partner – and Europe is the largest source of foreign direct investment into the US, with $3.6 trillion invested in the US by 2024. It also goes the other way: American companies make money by selling software, financial products and oil across the Atlantic.

Director of the Economics Program at the Center for Strategic and International Studies, Philip A. “There are basically no deep relationships in business,” Luck said. “If you look at AI (and) data center build-out right now, it’s being financed by revenues generated from Europe and other places.”

The trade war is not the only economic risk. Some analysts have warned that Trump’s threats against Europe could cause European investors to reduce investment in US stocks and bonds, causing the US dollar to weaken, US stocks to decline and US borrowing costs to rise. Higher borrowing costs, in turn, weigh on business investment and household spending, slowing economic growth.

Trump has used the unparalleled strength of the American economy as a powerful tool with which to bend allies and rivals to his will. And so far, he’s mostly got his way. Europe, which is dependent on US military support against a hostile Russia, has much more to lose from a crackdown, giving its leaders an incentive to appease Trump rather than fight back. That’s what happened last year, when the EU agreed to an unbalanced trade deal rather than risk losing US support for Ukraine’s war effort. But some analysts say it is not a foregone conclusion that Europe will retreat again.

On Saturday, Trump said he would impose 10% tariffs on Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands and Finland starting February 1. Trump wrote on social media that if a deal is not made by then to sell Greenland to the US, the tariffs will increase to 25% on June 1. The European products that the proposed tariffs would affect include: luxury and high quality goodsFrom French perfumes, cheeses and wines to German automobiles.

While trans-Atlantic goods trade has grown more slowly since the 2007–09 recession, US services exports continue to expand rapidly. This includes financial, legal and insurance services, but increasingly it centers on digital services and cloud computing provided by major US technology companies such as Microsoft, Amazon, Google and IBM. The EU is the largest destination for US services exports, which totaled $294.7 billion for the bloc in 2024.

Sridhar Ramaswamy, CEO of American cloud-software company Snowflake, said every successful tech company makes a large amount of its revenue from places like Western Europe. “Whether it’s regulation or actual fees and taxation, I think it’s very consequential,” Ramaswamy told Davos.

Some EU leaders have said they may delay approving last year’s trade deal with the US, which cuts tariffs on many US exports to Europe. They are also considering imposing retaliatory charges. Economists say Europe’s response will likely be calibrated to maximize political pressure on the U.S., targeting U.S. exports that are both visible and “symbolically important to red states,” says Brad W. Setser, an economist at the Council on Foreign Relations. In past trade disputes, the EU has imposed tariffs on products such as bourbon, Harley-Davidson motorcycles and agricultural goods.

“Think about the high-end consumer goods that Europe loves but could do without,” Setser said.

As tariff rates rise and Europe’s retaliation expands, the stakes rise exponentially. Some economists believe Trump’s threatened 25% tariffs on top of existing duties of 10% to 15% in some sectors are beginning to be high enough to deter two-way trade in the affected categories.

Even if Europe does not retaliate, economists say the additional tariffs will put little pressure on the U.S. economy, at least in the short term, as they raise prices for American companies and consumers.

a new study The Kiel Institute for the World Economy, a German think tank, found that US companies and consumers paid 96% of the tariff costs in 2024 and 2025, while foreign exporters absorbed only 4%. So far the tariffs have not led to the increase in inflation that economists expected, and the U.S. Economy grew at strongest rate in two years-Far ahead of Europe.

Yet the US economy has weaknesses. Its manufacturing sector, already under pressure from trade tensions and high interest rates and in contraction by some measures, is particularly vulnerable because its supply chains are tightly linked with Europe, Lovely said.

Many American factories source machines, turbines and components from Europe, and tariffs increase their costs. If Europe retaliates by imposing tariffs on American goods, manufacturers exporting across the Atlantic could be hit. “This is just another blow,” Lovely said.

Among the places most at risk: Spartanburg, SC The area is home to a massive BMW factory that employs approximately 12,000 people and indirectly supports thousands of jobs throughout South Carolina. The factory receives some engines and parts from Europe and exports more than half the cars it produces, many to the European Union. Stuart Pearson, head of automotive and mobility research at Oxcap Analytics, said BMW may have to cut production in the US due to retaliatory tariffs.

Still, U.S. carmakers are much less dependent on the European market and could benefit if higher tariffs hit European auto imports, making them less competitive, Pearson said. The tariffs could attract more foreign companies to open factories in the US, which would boost the manufacturing sector in the long run.

European investors own about $8 trillion of U.S. stocks and bonds, “almost twice as much as the rest of the world,” George Saravelos, global head of FX research at Deutsche Bank, wrote in a report published Sunday.

He said, “In an environment where the geo-economic stability of the Western alliance is being existentially disrupted, it is not clear why the Europeans would be so willing to take on this role.”

This is perhaps the first time Wall Street has wondered whether other countries might try to become less politically and economically engaged with the U.S. Concerns about a potential “sell-out to America” trade emerged early last year when the Trump administration signaled it was wary of supporting Europe militarily and again later when it threatened tariffs on global imports.

Those fears ultimately proved exaggerated. Foreign investors also showed strong demand for US financial assets last year, with the S&P 500 posting double-digit gains for the third consecutive year. US Treasuries remain the ultimate safe-haven asset for central banks and investors around the world, helping the country deal with huge budget deficits without facing higher interest rates.

Rich Nuzum, a top executive at asset manager Franklin Templeton, said markets have learned to ignore Trump’s tariffs and suggested the newly threatened levies on Europe would be similar. “There was a time when the market really cared about tariff announcements. That’s not the case anymore,” he said. “The market believes it will get done. It may be noisy, it may be disruptive, it may be scary, but it will get done.”

The most serious economic boost would come if Europe deployed its so-called anti-coercion tool, nicknamed the “bazooka,” which would allow it to target American services and investments. In such a scenario, the EU could raise taxes, tighten regulatory scrutiny or otherwise restrict US companies operating in Europe.

Sectors like pharmaceuticals will be affected by this. US companies often route R&D activities through countries such as Ireland and manufacture active ingredients there, allowing profits to be booked in the low-tax jurisdiction. Technology companies may also face similar risks. For example, Apple holds significant intellectual property and records a large share of global profits in Ireland, even though many of its devices are manufactured in China and around the world.

“The world’s most profitable companies have a significant European foot in their businesses,” said Setser at the Council on Foreign Relations. He said a move to Europe would then mean lower global profits for US companies, weaker stock market valuations, particularly in technology, and less ability to invest in areas such as artificial intelligence.

Write to Konrad Putzier konrad.putzier@wsj.comon Chao Deng choo.deng@wsj.com and sam goldfarb sam.goldfarb@wsj.com