What Trump presidency means for CEE

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US president-elect Donald Trump’s inauguration ceremony on Monday, 20 January, broke with centuries of tradition and allowed invitations to political leaders of similar political stripe. However, footage of former Poland prime minister Mateusz Morawiecki attempting to enter the ceremony site by showing US National Guard members his Wikipedia page at a barricade, may prove a portent.

Trump is nothing if not unpredictable, but his proposed economic agenda of radical tax cuts, tariffs and mercantilism will certainly pose challenges for Central and Eastern Europe (CEE). These policies, while ostensibly targeting global powers like China and Germany, are likely to have profound ripple effects on CEE, which is deeply integrated into European supply chains and reliant on foreign direct investment (FDI).

Reaganomics 2.0?

Trump’s protectionist trade policies, disdain for multilateralism, and volatile approach to transatlantic relations will likely impact CEE economies, already vulnerable due to their being tightly interwoven with Germany’s industrial base, and the next four years could bring a host of challenges for the region. 

Compounding this is the mercantilist thrust of Trump’s trade policy, reminiscent of the protectionist era of Reaganomics. However, while Reagan targeted Japanese exports, Trump has focused on tariffs against China and Germany, indirectly endangering CEE economies.

The German Economic Institute estimates that such trade wars could lower Germany’s GDP by 1.4% by 2028, translating into economic shocks for CEE economies that depend on German industrial performance​.

CEE nations, particularly Poland, Slovakia, Hungary and Czechia, serve as manufacturing hubs for German exports and are heavily integrated into supply chains for its automotive and machinery sectors. Disruptions in US-German trade flows would reverberate across the region, destabilising growth in economies already contending with inflation and stagnating productivity.

Germany remains the backbone of CEE’s economic integration, and a decline in Germany’s GDP due to trade tensions with the US, as modelled in a “worst-case scenario” by Erste Group Research, could result in GDP growth declines of up to 1% for Romania and Czechia, and 0.8% for Poland and Hungary​.

The auto industry has integrated supply chains across Poland, Hungary, Czechia and Slovakia, and Trump’s likely reintroduction of tariffs on European goods entering the US will reignite transatlantic trade tensions.

For CEE, which is already grappling with the fallout of the Ukraine war and shifting global supply chains, further strains on US-German relations could erode investor confidence and hinder growth. Tariffs would not only hit German carmakers but also CEE suppliers, threatening jobs and investments in the region.

After an administration from 2016-20, characterised by a high turnover of staff, political observers and politicians alike are resorting to Kremlinology to anticipate what Trump’s second term could bring. The only certainty with Trump’s return is that CEE faces heightened uncertainty. 

A realignment of US trade policies targeting Germany could disrupt the tightly interwoven economies of CEE, amplifying the urgency for diversification. With their futures tethered to Germany’s industrial health, CEE nations may need to reimagine their economic strategies to weather potential storms

Green transition in peril

Another joker in the pack is Trump’s scepticism toward green energy policies and its potential knock-on effect for the electric vehicle (EV) transition. Germany’s ambitious plans for EV production and related supply chains could slow if US policies sideline global collaboration on clean energy. For CEE, which has already begun to adapt its industrial base to EV components, such a regression could hamper long-term goals.

Trump’s previous stance against electric vehicle (EV) incentives and his likely rollback of climate-focused policies could slow the EV transition, jeopardising Europe’s green transition efforts. Since CEE is adapting its industrial base to meet the demand for EV components, any setback in global EV adoption would hinder these economies’ modernisation efforts​.

Slovakia and Hungary, whose exports to the US are dominated by vehicles and automotive parts, would face compounded risks. Both countries are also exposed to German economic health, with up to 30% of their exports directed to Germany​.

The energy sector provides another flashpoint. Trump’s push for expanded oil and gas production aligns poorly with Europe’s climate goals, but it could have particularly adverse effects on CEE. Countries like Poland, still reliant on coal, are navigating a fraught transition to greener energy sources while balancing energy security concerns. A U.S. return to aggressive fossil fuel extraction could strengthen global markets for these resources, delaying Europe’s energy transition and entrenching reliance on fossil fuel imports – a risk heightened by the region’s historical dependence on Russian energy supplies.

These economic pressures are compounded by the geopolitical vulnerabilities of CEE countries, which are increasingly caught between competing US and EU agendas. Trump’s unilateral approach to renegotiating trade agreements and undermining global institutions like the WTO risks further isolating smaller, export-reliant economies in the region. As tax bases shrink, energy transitions stall and industrial linkages are strained, the question for CEE leaders is how to navigate these shocks while safeguarding their nations’ stability and growth.

A potential path forward could draw inspiration from Europe’s evolving strategies to counteract external economic threats. Proposals for “interposition protectionism”, where market access is used as leverage to enforce tax standards on multinationals, could offer a blueprint for mitigating Trump-era disruptions. By embracing collective action to uphold minimum tax and climate standards, CEE nations could protect their long-term interests while aligning more closely with EU priorities.

Trump’s trusted advisor lays out trade future

Predictions are speculative, however, not only due to Trump’s capricious personality, but also the revolving door of his earlier administration. For now, Robert Lighthizer, a lawyer who was the US Trade Representative from 2017-21, has Trump’s ear.

In his book “No Trade Is Free”, Lighthizer devotes a whole section to the “mercantilist industrial policy” of Germany, in which he notes that Europe’s biggest economy’s goods surplus with the US was about USD 70bn. “This is the biggest piece of the overall problem in 2021,” Lighthizer adds.

Lighthizer’s comments also highlight concerns about Germany’s export-oriented model, and his critique of the country’s close economic ties with China and Russia, particularly during Merkel’s tenure, underscores the geopolitical vulnerabilities created by such dependencies.

No Trade is Free also quotes Former Federal Reserve chairman Ben Bernanke’s comment that the International Monetary Fund in 2014 estimated Germany’s inflation-adjusted exchange rate was undervalued by 5-15%. Moreover, the surplus is buoyed by Germany’s tight fiscal policy that suppresses domestic spending, including on imports.

Acknowledging Germany’s “world-class manufacturing sector” and leadership in auto, machinery and pharmaceuticals, with an industrial policy that “has always encouraged exports and generally discouraged domestic consumption”. Germany’s trade surplus with the US—USD 70bn in 2021—has long been a source of tension in transatlantic relations, with ripple effects for the economies of CEE, he added.

“The biggest reason, however, for the German trade dominance since 1999 is the euro. Thanks to the common currency, according to No Trade Is Free, “Germany can continue to run surpluses with the United States and much of the rest of the world while maintaining a relatively undervalued currency that boosts its export industry.”

The euro’s role in sustaining German dominance is a now a moot point for CEE countries: while integration with Germany’s industrial base has driven regional development, it has exposed them to global trade shifts. Policymakers in CEE must weigh the benefits of maintaining their close ties to Germany against the risks posed by potential US-driven disruptions.

Lighthizer slams Germany’s China policy

Germany also “heavily supports its manufacturing industries through government industrial policy” and “specifically targets key sectors, including steel, metals, chemicals, automobiles, medical devices, and aerospace” with subsidies and “encourages company mergers where size is needed for success”.

Merkel visited China 13 times while in office and resisted US requests to keep China’s telecom company Huawei out of German telecom networks to prevent spying. Partially as a result of these efforts, Germany has regularly run sizable trade surpluses with both countries (this has changed recently, at least temporarily, because of sanctions associated with the Ukraine war and the effects of COVID-19). 

Before leaving office, Merkel pushed through a still unratified China–EU investment treaty that “was viewed as an economic win for China… Unfortunately, the new Chancellor Olaf Scholz seems to be following the same shortsighted China-friendly policy over the objections of his security experts and some coalition partners,” Lighthizer wrote.

However, he added that “there is also a growing awareness that German as well as American industry is being hollowed out by Chinese industrial policy. Germany’s automobile and auto parts manufacturers are under stress from Chinese imports, and Germany’s solar power industry has been wiped out.”

The North American Free Trade Agreement (NAFTA) was signed in 1992 by Canada, Mexico, and the US, established a free-trade zone in North America and took effect in 1994. “NAFTA’s impact on the auto industry in the United States—and on US autoworkers—was profound (and) painful for workers in Michigan and other places who lost their jobs as a result. But the companies kept their manufacturing of trucks and higher-end models in the United States, and their Mexican factories sourced high-value-added parts such as engines and transmissions from US factories. 

“While cold consolation to American auto workers who lost their jobs, there’s an argument that the US auto companies needed a low-cost manufacturing platform such as Mexico to remain competitive during this period with Asian and European car companies who had their own low-cost assembly venues in Southeast Asia and Eastern Europe,” Lighthizer wrote.

Geopolitical instability, CEE’s NATO role

CEE economies are closely tied to EU funding, much of which is underpinned by German economic strength. A Trump presidency could strain US-EU relations, possibly slowing the bloc’s ability to coherently respond to economic or geopolitical pressures, leaving CEE countries more exposed to external shocks and economic instability. A second Trump presidency could disrupt CEE, increasing the need to diversify economic dependencies and becomes ever more urgent.

Beyond trade, Trump’s transactional foreign policy could undermine NATO unity and European security guarantees. For CEE, where countries like Poland and Hungary are heavily reliant on NATO for defence, this would introduce significant risks. Additionally, Trump’s likely reduction in U.S. aid to Ukraine could destabilize the region further, both geopolitically and economically​.

Trump’s transactional approach to foreign policy could erode trust in NATO and weaken security guarantees for CEE, where countries heavily rely on the US for defence support. In the face of Russia’s continued assertiveness. A weakened NATO would also undermine investor confidence, potentially affecting foreign direct investment for automotive plants in CEE.

Race to the bottom in taxation

Another concern is the intensification of global tax competition. Trump’s first term saw a cut in the US corporate tax rate from 35% to 21%, with further reductions floated for this term. For CEE nations, which already offer some of Europe’s lowest corporate tax rates to attract FDI, this shift could trigger a damaging “race to the bottom”.

Hungary and Bulgaria, with respective rates as low as 9% and 10%, could find their tax bases further eroded, leaving them struggling to fund public services or the green energy transition.

As Trump’s policies reshape global economic relations, CEE’s resilience will depend on its ability to adapt to these shifts, balancing external pressures with its domestic imperatives.