Europe is confronted with serious geoeconomic and geotechnological challenges aggravated by American pressure to limit the trade deficit with the EU, simultaneously increase investment in the United States, and take on a higher share of common defense spending. These have been caused primarily by China’s ongoing global expansion and Russia’s war in Europe. In the first year after the introduction of deficit-based tariffs (April 2025 – March 2026), EU exports to the United States fell by 13.7% year on year, while imports from the US rose by 1.8%. The EU’s trade surplus with the United States shrank by 35.6%, turning the matter from a trade dispute into a question of Europe’s industrial resilience.
Against this backdrop, the EU’s lagging behind and (self-)exclusion from the most advanced technological achievements of the United States appears increasingly problematic. This dynamic is becoming ever clearer following the US government’s ban on exporting Anthropic’s newest and most powerful models to Europe, in the very week when the technology giant Apple deprived its European users of access to its latest software innovations because of sanctions imposed by the European Commission.
In their latest publication, “The Aftermath of the 2025 U.S. Tariffs: How Countries Are Adapting to an Uncertain Global Trade System”, the Global Trade and Innovation Policy Alliance (GTIPA) and the Applied Research and Communications Fund (ARC Fund) assess how the new rules affect the economic and trade policies of 25 countries, 10 of them in Europe. One of the central findings is that the United States has succeeded in imposing its terms without retaliation from the affected countries. Most countries have chosen to avoid retaliatory tariffs or other forms of trade-war escalation, preferring instead strategic reorientation and diversification of their trade flows. This muted response clearly reflects the enormous economic and military power of the United States. At the same time, the multitude of global geoeconomic crises will likely lead most countries to fall short (perhaps by wide margins) of fully implementing all the provisions of their trade and investment agreements with the US. It is also unlikely that the EU will fully abandon its regulation and control of American technologies on the European market, despite talks of adaptation.
The new US trade policy, combined with other serious disagreements, has substantially eroded the confidence of Europe in the role of the US as an economic and defense guarantor of last resort. The EU has begun, and will continue, to steer its national policies toward the pursuit of independence and levers of influence:
- Securing independent access to critical technologies such as artificial intelligence, computing infrastructure and dual-use technologies, as well as to critical raw materials.
- Pursuing digital sovereignty, conceptually developed through the EuroStack initiative, which aims to reduce the EU’s dependence on imports of digital technologies and infrastructure.
- Re-industrialization and the locking of critical value chains into the EU through mechanisms such as “Made in Europe”, aimed at prioritizing European suppliers in public procurement.
- Seeking additional trade opportunities through free-trade agreements, such as the recently concluded arrangements with Mercosur in South America.
The EU’s vulnerability in high-value-added trade flows
On 2 April 2025, the administration of President Donald Trump imposed a universal baseline tariff of 10% on imports from almost all of its trading partners. The measure was announced as part of the so-called “Liberation Day”, marking the start of a sought-after change to global trade rules aimed at reducing the United States’ trade deficits. American policymakers have long regarded these deficits as responsible for the outflow of US capital, industrial production, jobs and opportunities to the rest of the world, particularly to China and Europe.
After the tariffs were announced, attention within the EU turned to identifying other potential dependencies that could be used to exert economic pressure in the future. For example, trade in services reveals a deeper layer of European vulnerability vis-à-vis the United States. In 2025, European exports of services to the US remained almost unchanged, while imports from the US grew by 8.1%, widening the negative balance and the outflow of income on services by 28.8%. The most significant pressure comes from technology-related payments. Imports of intellectual-property rights from the US grew by 13.7%, the deficit on them deepened by 14.6%, and on other business services the negative balance widened by 35.8%. At the same time, the EU’s positive position in telecommunications, computer and information services declined by 8.3%. This means that Europe is losing its price advantage in goods and is exporting an ever-larger share of value added to American owners of rights, platforms, software infrastructure and business services. These figures indicate that the EU’s regulatory control is not sufficient to guarantee digital sovereignty. The EU needs to build the capabilities and competitive advantages to retain technological rents, productivity and high-income services within its own economy.
Figure 1. EU imports of services from the US, annual values
Source: Applied Research and Communications Fund, based on data from Eurostat
The decline in exports to the US over 2025–2026 shows that the effect of the tariffs has already moved beyond firms’ initial reaction. Exports are not merely shifting in time but are readjusting to lower certainty of US demand, thinner profit margins and higher risk on long-term export contracts. For the EU, this means it will have to pursue a more aggressive linkage of trade policy with industrial policy, in order to safeguard the resilience of European production models when the rules change. The result could be a return of trade imbalances with the US and a repetition of the episodes of escalation.
Bulgaria’s geoeconomic vulnerabilities
Bulgaria’s exposure to US tariffs remains small in overall trade terms, but high in terms of sectoral sensitivity. The 23.7% drop in exports to the US shows that part of Bulgaria’s export basket reacts more sharply than the EU average to a change in the price of access to the US market. This is a signal of weak pricing power in specific product groups, rather than of a general weakness in the economy’s external trade. The policy response should therefore be sectoral and nuanced, because the vulnerability is concentrated.
In terms of the overall macroeconomic picture, real GDP growth remained stable in 2025 at 3.1% (against an EU average of 1.5%). This growth, however, appears to be driven mainly by the services sector, where turnover rose by 5.8%, while turnover in industry recorded a slight decline of 0.3%. The absence of a large-scale macroeconomic shock (of the kind predicted immediately before and after “Liberation Day”) is a dynamic that holds for the EU as a whole and that underscores the region’s high economic resilience. Even so, growth in Europe and in Bulgaria is becoming increasingly fragile amid the accumulation of multiple overlapping crises, which also accounts for the EU’s far more restrained response to the war in Iran and the subsequent closure of the Strait of Hormuz.
The main concern is the growing risk of continued industrial decline, since overall resilience is being sustained by services and domestic dynamics. This divide is central to economic policy. The tariffs manifest themselves mainly as pressure on export-oriented manufacturing, lower capacity utilization, tighter margins, and more cautious investment decisions in sectors tied to foreign orders. This puts the EU industry under pressure to compete on price internally, which, in the sharpened global geoeconomic environment, should translate into a higher inflow of investment into Bulgaria, particularly following the country’s accession to the eurozone. Seizing these opportunities will come at the expense of Europe’s industrial core, which in turn will increase pressure on the Bulgarian government for ever-closer integration and policy alignment, including on external sanctions, within the EU.
The effect on Bulgaria’s trade
In the near-term, Bulgaria remains only marginally affected by the trade war due to the relatively small share of goods and services that the country exports to the US. Shortly before “Liberation Day” was announced, Bulgaria National Bank’s (BNB) export data for March 2025 showed Bulgaria’s high degree of integration into European supply chains. In March, the country’s top five export markets were Germany, Romania, Türkiye, Italy and Greece, with combined monthly exports of €1.7 billion (or 47% of Bulgaria’s total monthly exports to the world), while the US ranked eighth with €93 million — for comparison this constitutes only 4% of Bulgaria’s total exports to the EU-27 in the same month. Even so, under the influence of the tariffs, the weakening of the US dollar against the euro and, probably, the more aggressive rhetoric of the US administration toward the EU, exports from Bulgaria to the US in absolute terms have declined steadily (Figure 2) to €53.3 million in January 2026 (a decline of 42% compared with the same month a year earlier).
Figure 2. Bulgaria’s exports to the US by month for the period January 2025 – February 2026 (in euros)
Source: BNB. The red line marks the introduction of the 10% baseline tariffs
The direct effect of US tariffs on Bulgarian exports separates products with low price resilience from those with a stronger contractual and technological position. Metals take the brunt of the pressure first, as they are more easily substitutable and more sensitive to the final price – in the first quarter of 2026, copper exports declined by 65.3% and aluminum by 93.2%, compared with the same period a year earlier. More consequential for industrial policy is the 42.9% drop in precision and medical products, because it affects market positions with higher value added, certification requirements and a longer recovery horizon. The more stable performance of machinery and electrical equipment shows that specialization, contractual resilience, and lower substitutability are the real protection for Bulgarian exports under a less favorable US trade regime.
The deterioration of the balance with the US shows that the direct effect does not end with exports. Bulgaria is moving from surplus to deficit, because the weakening of export positions coincides with an almost doubled level of imports from the US, driven mainly by aircraft deliveries. These imports are capital in nature and do not signal a broad structural shift, but they change the net external trade position at a moment when Bulgarian producers are losing access to US demand. The policy-level conclusion is that the assessment of the tariffs’ effect must link three indicators – the decline in exports, the change in the balance, and the capacity of capital imports to raise future productivity.
The more significant medium-term risk to Bulgarian industry comes via Germany. German exports to the US are contracting by 12.7%, and for cars and parts the decline reaches 27.8%, which coincides with a 13.7% drop in Bulgarian exports of cars and parts to Germany. This clearly traces an industrial transmission of the pressure through the German automotive system, in which Bulgarian firms participate as suppliers of components, cables, electronics, and plastic and metal parts. At the same time, total Bulgarian exports to Germany remain stable- electrical equipment is growing by 7.2% and machinery by 2.0%, while copper and pharmaceuticals follow a different logic, tied respectively to commodity cycles and regulated product flows. Policy should therefore be sectoral, with a separate focus on automotive components, the price-vulnerable commodity groups, and the more resilient industrial niches with potential for upgrading. The increasingly complex geoeconomic environment requires the Bulgarian administration to move away from simplistic, one-size-fits-all policies toward a focus on innovative niches and enterprises with high-growth potential.
Figure 3. Bulgaria’s exports to the US and Germany in key sectors, annual values
Source: Applied Research and Communications Fund, based on data from Comext.
Beyond the data: the EU’s response
Diversification is one of the EU’s principal responses to the protectionist actions of the US, and over the past year Brussels has set a new trajectory for its trade policy. Since April 2025, the EU has activated a series of international agreements designed to ease the negative effects of the newly created trade barriers. On 1 May 2026, provisional application of the trade agreement with Mercosur began, which is projected to increase EU GDP by €77.6 billion (by 2040). This agreement entered into force more than two decades after the start of formal negotiations on it, and a significant catalyst for its adoption by both sides was the new tariff regime. Looking ahead, the EU plans to reduce trade barriers with other key international markets as well:
- India: The Agreement on free trade between the EU and India will reduce or eliminate 90% of current tariffs on imports into India and is expected to deliver a 107.6% increase in exports to India by 2032.
- Indonesia: The Agreement on a Comprehensive Economic Partnership (CEPA) will encourage new investment flows into the dynamic Indonesian market and will facilitate exports of goods worth €9.7 billion.
- Singapore: The Agreement on digital trade represents an important step in the development and commercialization of digital technologies, while also encouraging investment in one of the world’s leaders in innovation.
This momentum in concluding bilateral agreements clearly points to Europe’s future horizon of focusing on maintaining strategic partnerships, especially with fast-growing economies, which offer dynamic markets and good alternatives for creating value added beyond the US and China. At the same time, the EU has continued to harden its stance and strengthen its capabilities and its pressure against China’s unfair trade practices and Russia’s militarized economy, in step with the US. The American and European economies together account for roughly 43% of global GDP, and the US remains the largest importer of EU goods. Therefore, maintaining a bilateral dialogue to prevent a future escalation of the trade war, as well as the timely implementation of the commitments under the Trade Agreement between the EU and the US, remain the most likely next steps after the period of tension in transatlantic relations. The EU and the US have already signed a cooperation agreement in the field of critical metals and minerals, and one is soon expected on the security of value chains in the field of artificial intelligence and its broad economic application. Bulgaria’s lagging behind of these trends, especially relative to its EU neighbors such as Greece, is a serious signal of possible future geoeconomic losses. A precise estimate is difficult, but Hungary’s experience suggests that geoeconomic divergences can carry an economic cost comparable to, or higher than, the losses resulting from signing on to the Russian “Grand Slam” projects in Bulgaria’s energy sector before the country’s entry to the EU in 2007.
The opportunities for Bulgaria?
Given the substantial fiscal transfers through European funds, Bulgaria’s smart position would remain closely tied to the EU’s approach. While the predictability of new tariffs remains low, the country’s priority policies for sustainable economic development remain oriented toward making better use of the single market and maximizing participation in the European Commission’s newly introduced initiatives for economic security and competitiveness, including:
- Adopting EU Inc. — the so-called 28th regime, which would make it easier to create and scale Bulgarian companies across Europe.
- Expanding the opportunities for investment in constructive capital in Bulgaria’s regions, based on better governance, transparent and competitive public procurement, accelerated digitalization, and the use of the competitive advantages identified in the smart-specialization strategies.
- Effectively implementing the multi-fund system, which would create a flow of financing to highly innovative companies and ensure both economic growth and technological security.
- Increasing R&D investment to 1.5% of GDP and concentrating strongly on the development of STEM education and Bulgaria’s strengths in the technical and medical sciences, and the attraction of doctoral students — with an emphasis on digitalization and entrepreneurial skills, in line with the recommendations of the “Innovation.bg” report.
- Accelerating implementation of the SAFE financial mechanism, accompanied by active support for and development of companies working on dual-use infrastructure and technologies. This would enhance strategic independence, expand the export potential of the defense industry, and make use of the lighter rules on state aid and public procurement for high-value-added re-industrialization.
In this way, Bulgaria’s ability to take advantage of the EU’s new trade architecture will depend not so much on external negotiations as on the pace of domestic reforms. Diversification at the European level opens up markets, but the competitiveness that will determine whether Bulgarian companies reach them is built at home — through innovation, human capital and investment in infrastructure. And above all, through the sustained reduction and elimination of the tax of state capture, corruption and poor governance.
Authors:
Ruslan Stefanov, Director, Strategy and Innovation, Applied Research and Communications Fund, Member of the EU’s network of Trade Champions
Tsvetomir Nikolov, Analyst, Energy and Climate Program, Center for the Study of Democracy
Georgi Dobrev, Analyst, Science, Technology and Innovation Policy, Applied Research and Communications Fund
Acknowledgements:
Special thanks to Mackynzi Adams, intern for the Geoeconomics and Law Programs at the Center for the Study of Democracy, for the translation and editing of the text.
