US trade policies and the activity of US multinational enterprises in the euro area

Prepared by Lorenz Emter, Michael Fidora, Fausto Pastoris, Martin Schmitz and Tobias Schuler

Published as part of the ECB Economic Bulletin, Issue 4/2025.

Affiliates of multinational enterprises (MNEs) headquartered in the United States contribute substantially to euro area economic activity. Hence, ongoing trade tensions have potentially important implications for their operations. US MNEs serve the euro area market either by exporting goods and services directly to euro area customers or via affiliates located in the euro area.^[1] These affiliates may trade with the United States and third markets, so ongoing trade tensions could affect US MNEs in the euro area via higher tariffs and disruptions to intra-firm trade, as well as via any resulting changes in tax planning strategies. Euro area affiliates of US MNEs account for over 5% of euro area value added, gross operating surplus and purchases of goods and services, and 2% of persons employed, with substantially higher shares for Ireland (Chart A).^[2]

Chart A

Activity of US multinational enterprises in the euro area

(proportion of US-controlled affiliates in country’s total; 2022)

The dynamics of the euro area bilateral current account with the United States also reflect the activity of US MNE affiliates in the euro area. The euro area current account with the United States was nearly balanced in 2024, as the increasing surplus in goods trade was almost entirely offset by deficits in services trade and foreign direct investment income, with US MNEs contributing significantly to these components (Chart B). ECB estimates suggest that almost 30% of the euro area goods surplus with the United States in 2024 involved trade by euro area affiliates of US MNEs, while these companies accounted for around 90% of the euro area deficit in services trade.

Chart B

Euro area current account balance vis-à-vis the United States

(annual flows as a percentage of GDP)

US MNEs shape euro area trade in goods with the United States via substantial intragroup trade, exports of pharmaceutical products and contract manufacturing. The widening goods trade surplus vis-à-vis the United States is driven mostly by a pronounced increase in exports of pharmaceutical products (Chart C), which are mostly attributed to trade flows of Irish affiliates of US MNEs. Moreover, US MNEs resident in the euro area engage in contract manufacturing arrangements by contracting firms outside the euro area to produce goods that are sold in third countries (including the United States) without ever entering the euro area. These exports are recoded in the balance of payments statistics, driving up the goods surplus.

Chart C

Euro area goods trade balance vis-à-vis the United States

(four-quarter moving sums as a percentage of GDP)

Chart D

Euro area services trade balance vis-à-vis the United States

(four-quarter moving sums as a percentage of GDP)

Production linked to US MNEs in the euro area is closely connected to corresponding services imports, reflecting their supply chains and tax optimisation strategies. US MNEs use imported intellectual property products (IPPs) as central inputs in their euro area production activities. Since 2020 the euro area has recorded increasingly high values of services imported from the United States. These are driven by IPP usage charges linked to US MNE affiliates in the euro area, mainly in Ireland (Chart D).^[3] Apart from supporting the production of high value-added goods – for example medicines – these IPP imports are also used to produce information and communications technology (ICT) services. This means that the presence of US MNEs in the euro area also increases euro area services exports, boosting the euro area’s export market shares, particularly in ICT services, via Ireland which accounts for a comparable share to that of the United States of about 14% (Chart E). This particular configuration of supply chains, involving imports of IPP-related services, enables US MNEs to accrue substantial profits in the euro area and benefit from more favourable corporate taxation, which is mirrored in the euro area’s substantial foreign direct investment income deficit vis-à-vis the United States (Chart B).^[4]

Chart E

Export market shares of information and communications technology services

(percentages)

Higher tariff barriers could affect the output and profits of US MNEs in the euro area, including in the pharmaceutical sector, depending on whether these enterprises adjust prices or move production. Given that pharmaceutical exports from the euro area to the United States are strongly linked to supply chain and tax optimisation strategies of US MNEs, these trade flows are vulnerable to relocation risks. While the high profitability of their subsidiaries (Chart F) may allow US MNEs to partially absorb additional US tariffs, these could render their business model less attractive, especially if accompanied by changes in US taxation and regulatory regimes incentivising onshoring of production to the United States.^[5] US trade policies could also indirectly affect US MNE affiliates in the euro area if these are subjected to EU retaliatory measures.

Chart F

Sectoral profitability for affiliates of US multinational enterprises in the EU

(ratio of gross operating surplus over net turnover)

A relocation of US MNEs’ operations away from the euro area could result in lower euro area GDP via reduced production and exports, although gross national income (GNI) and employment would likely be less strongly affected. For cases where IPP ownership remains with the parent US MNE, the relocation of US MNE operations away from the euro area would reduce euro area GDP primarily through lost exports, which are only partly offset by lower IPP services imports. However, employment and, in particular, GNI would be less strongly affected as US MNE production is capital-intensive and highly reliant on imported IPPs, which generate large payments in the form of profits repatriated to the United States (Chart B). In cases where euro area affiliates of US MNEs own the IPP underpinning production and exports, their relocation to the United States would also negatively affect euro area GDP as a result of a mechanical depreciation effect.^[6] Over a longer period, productivity may suffer if the domestic economy is no longer gaining the positive spillovers from engagement with US MNEs.^[7]