This chapter is part of a report written in collaboration between the Center for American Progress and the Foundation for European Progressive Studies (FEPS).
The European Union stands at a crossroads. Faced with converging crises—from disrupted supply chains and protectionist trade winds to escalating energy insecurity and technological lag—the EU must rethink its trade and industrial policy foundations. With a second Trump administration accelerating U.S. economic nationalism, the stakes for Europe have grown even higher. This chapter examines how the EU is responding to this turbulent geoeconomic landscape, where strategic autonomy, competitiveness, and resilience are no longer aspirational concepts but urgent imperatives.
Strategic context
Over the past five years, the EU has faced disruptions that have challenged its economic model—its growth, its trade, and its industrial policy. The COVID-19 pandemic exposed supply chain vulnerabilities, highlighting the risks of external dependencies. Rising geoeconomic tensions, evident since U.S. President Donald Trump’s first term, have shifted global trade toward protectionism, threatening the EU’s export-driven economy. Russia’s war against Ukraine shattered assumptions about the Green Deal’s feasibility, as soaring energy costs have eroded European competitiveness. Meanwhile, the U.S.-China tech rivalry has exposed Europe’s lag in artificial intelligence (AI), digital technologies, and semiconductors. With President Donald Trump’s return to office, Europe must accept that the “peace dividend” is over and take responsibility for its own security. This is not just one geopolitical shock but a convergence of disruptive forces that make adapting EU trade and industrial policies particularly complex and urgent.
Policy continuity and change
The new European Commission and European Parliament took office in December 2024 amid mounting pressure to redefine the EU’s economic and strategic direction. Competitiveness will be at the heart of the debate, with former European Central Bank President Mario Draghi and former Prime Minister of Italy Enrico Letta’s landmark reports on revitalizing Europe’s growth model and completing the single market, along with the new “competitiveness compass,” shaping the next five years. While there is consensus on the need for economic reforms, the key battle will be over how to balance pro-growth and innovation policies with Europe’s social model. Unlike the United States, the EU will likely resist deep deregulation, ensuring competitiveness does not come at the cost of the welfare state.
Trade policy is also expected to evolve. Europe is moving toward a more strategic trade approach, emphasizing resilience over traditional liberalization. This means stronger trade defense tools, tighter investment screening, and greater scrutiny of economic dependencies, particularly with China. However, this does not mean that the EU is turning inward. To compensate for growing global uncertainty, the EU is likely to pursue new trade partnerships to counterbalance U.S. protectionism. The recent, though long-delayed, Mercosur trade deal proves that the EU will strategically use opportunities to secure access to key markets and raw materials. At the same time, transatlantic trade relations will remain complex. The EU is likely to challenge U.S. protectionist policies more robustly than it did the Inflation Reduction Act—which included generous domestic subsidies and local content requirements for clean energy technologies—while also seeking common ground on supply chain security, Chinese technological competition, or even digital trade rules.
At the fiscal level, the EU is moving toward greater flexibility. While Europe has traditionally been stricter than the United States on debt, there is growing acceptance of common debt instruments and more room for strategic investment, particularly in green and digital transitions. Despite political shifts, the EU will defend its climate commitments, though it may take a more pragmatic approach to energy security.
Another major change is expected within EU defense policy. With growing security concerns and an unpredictable United States, the EU will ramp up defense spending. It has already announced an 800 billion-euro investment package in defense and security. Moreover, it will seek to rely less on U.S. technology and suppliers. Today, two-thirds of European defense procurement benefits non-EU producers, a pattern likely to change as Europe invests more in its own capabilities. It will also aim to strengthen its own defense industrial base by buying from European producers.
Overall, while the EU’s position remains largely defensive, these shifts could make it more self-confident over time, particularly if the United States withdraws further from European security commitments. The next five years will determine whether the EU emerges as a stronger, more independent global player or remains in reactive mode amid shifting geopolitics.
Diverging interests and approaches between the European Union and the United States
The first months of Trump’s presidency have surpassed even the most pessimistic European expectations. A wave of geopolitical disruptions, combined with an increasingly aggressive stance on trade and economic relations, has forced European policymakers to reassess long-held assumptions about transatlantic cooperation. If there was ever a lingering belief that the EU could take its strategic partnership with the United States for granted, President Trump’s return has erased it. Even traditionally cautious EU member states now acknowledge the urgency of Europe becoming more autonomous in key strategic dimensions—including trade, industry, and technology—to strengthen its strategic sovereignty.
One of the starkest areas of divergence will be trade policy. The Trump administration has doubled down on protectionist measures, applying tariffs indiscriminately—even against allies and close partners of the United States. The EU, caught between its lukewarm commitments to open trade and protectionist impulses, will struggle to maintain a coherent position. While Europe has been critical of U.S. trade barriers, its own climate policies—such as the Carbon Border Adjustment Mechanism—could create similar tension points, particularly in sectors where EU competitiveness is declining. At the same time, the EU has remained open to cooperation with like-minded partners to protect at least some of the existing global trade regime––a reality that might also create tensions with the United States.
Technology will be another major fault line in transatlantic relations. The United States has historically taken a more relaxed approach than Europe to regulating digital technologies, prioritizing innovation and market expansion over oversight. Under the Trump administration, this trend could accelerate, particularly with tech magnates closer to the White House than ever before. Washington’s laissez-faire stance on AI, data privacy, and platform accountability stands in direct contrast to Brussels’ Digital Markets Act and Digital Services Act, which emphasize consumer protection and corporate responsibility. While U.S. policymakers see AI and digital platforms as drivers of economic and geopolitical power, the EU remains concerned with balancing competitiveness with public interest, curbing monopolistic practices, and ensuring democratic safeguards and fair taxation of tech companies. The diverging views on the responsibility of Big Tech could become a defining transatlantic dispute in the coming years.
On climate and the green transition, the gap between the United States and the EU will likely widen substantially. While the EU is shifting toward a more pragmatic approach to industrial competitiveness, it remains committed to sustainability. The Inflation Reduction Act has already sparked tensions, with European industries fearing U.S. subsidies will lure investments away. Under the Trump administration, the United States could retreat further from global climate commitments, forcing Europe to recalibrate its strategy—but not abandon its long-term transition to a cleaner economy.
Defense policy is another flashpoint. Europe is set to increase military spending, but with a growing focus on scaling up its own defense industry rather than relying on U.S. suppliers. Currently, two-thirds of EU defense procurement benefits non-EU firms, especially American contractors. This dynamic is set to change as Europe builds greater strategic autonomy.
Overall, although Europe is trying to avoid decoupling from the United States, Trump’s economic nationalism and hostility toward European allies might force a hesitant Europe to substantially reevaluate what is at stake in EU-U.S. relations. In the past, Brussels has sought to avoid any deeper, long-term strategic divergence from Washington, but Trump’s return has injected new urgency into discussions about European sovereignty and autonomy. Whether intentional or not, Trump’s presidency could radically transform Europe’s approach to trade, industrial policy, and technology—as well as the geostrategic interests of the European Union—reinforcing the need for a more independent Europe and potentially increasing the gap between Brussels and Washington. Whether this results in managed competition or a widening transatlantic rift will depend on how both sides navigate these tensions.
Advancing shared agendas
As already mentioned, despite growing tensions, the EU is not seeking a rupture with the United States. Even under a second Trump administration, there remain areas of shared interest, particularly on China. The European Union will not recalibrate its stance on China as a systemic rival, economic competitor, and security risk any time soon. While individual member states may maintain business ties, derisking will remain the dominant narrative, providing room for EU-U.S. cooperation. However, the risk remains that the Trump administration may one day strike a trade deal with China that prioritizes U.S. economic interests at Europe’s strategic expense.
Another area of potential alignment is economic security and supply chain resilience. The pandemic and geopolitical shifts have underscored the need to diversify access to critical raw materials, rare earths, and other resources essential for emerging technologies. Both the United States and the European Union are increasingly prioritizing partnerships with reliable suppliers outside China, providing opportunities for transatlantic collaboration.
Maritime security is another domain where transatlantic cooperation could persist. The EU and the United States share a vested interest in securing global trade routes, particularly in the Indo-Pacific. Protecting freedom of navigation, countering piracy, and responding to security threats in international waters will remain areas where cooperation can continue, even under a more isolationist U.S. administration. However, recently divulged high-level conversations on the Signal messaging app bring into stark relief how even mutual security interests—such as freedom of navigation—can trigger accusations of European “free-loaders.”
That said, the most significant challenge for EU-U.S. relations under the Trump administration will be the ability of European governments to engage effectively with Washington. While cooperation with the federal government may prove difficult, with few areas of continuity and convergence between both sides of the Atlantic, Europeans should intensify partnerships with individual American states that have progressive leadership. Especially in areas such as climate or green technology, such partnerships can help compensate for the lack of cooperation with federal authorities. Cities and states committed to sustainability, such as California, will become key allies for European policymakers seeking continuity in transatlantic cooperation.
At a deeper level, progressives on both sides of the Atlantic must recognize that Trump’s resurgence—and the rise of the far right in Europe—is rooted in the legitimate social anxieties and deep feelings of injustice among both Europeans and Americans. For decades, progressives have warned about the destabilizing effects of globalization, unregulated free trade, and financialization, which have led to job insecurity, stagnant wages, and growing inequalities. Yet solutions have often come too late or have failed to convince those most affected. Many workers feel that they have lost not just economic security but also dignity and respect. This failure has left space for right-wing populists who exploit grievances without delivering real solutions.
The challenge now is to craft an economic and industrial policy that genuinely rebuilds trust. The deindustrialization of many regions has deepened political divides—not because of nostalgia for declining industries but due to the lack of a credible alternative and perspective. The lesson learned from the Biden administration’s economic policy agenda is critical for Europe, too: Even policies designed to benefit working people do not automatically translate into political support and trust. Leaders must not only design effective economic strategies but also communicate them in a way that restores public confidence in their leadership on trade, industry, and innovation.
If progressive forces in the European Union and the United States fail to address these underlying issues, the next decade could see an even deeper fragmentation of democratic societies. The task is not just to counter Trumpism but to offer a vision that resonates with those who feel left behind—on both sides of the Atlantic.