Protectionism 2.0: How digital economies might become the latest front in escalating trade wars
By Alice Albizzati & Nirwan Tajik
When President Trump declared April 2 “Liberation Day,” few in Europe’s tech sector expected to be on the front line.
A 10% blanket tariff on all U.S. imports - and a 20% surcharge for EU goods - was widely interpreted as a move against traditional manufacturing rivals. But for European startups and investors, the implications reach far deeper: what looks like a trade war on physical goods risks opening a second, less visible front on digital economies.
While software exports aren’t currently tariffed, they’re now squarely within political crosshairs. In Brussels, retaliation is being prepared. European Commission President Ursula von der Leyen warned that “all options are on the table.” Manfred Weber, head of the European People’s Party, went further, explicitly naming American tech firms as a legitimate target for EU countermeasures. These companies generate substantial revenues in Europe while contributing little in taxes. Proposed countermeasures include reviving national digital services taxes (DSTs), excluding U.S. firms from public procurement, and potentially suspending IP rights or capital market access for dominant U.S. tech platforms.
Germany's Economy Minister Robert Habeck confirmed that digital retaliation options are being actively reviewed by the European Commission - including suspending patents, restricting access to public procurement, or even banning certain U.S. digital products from the European market. "We must prepare for all scenarios," he said.
France's Trade Minister Laurent Saint-Martin stated that no option should be ruled out - not for goods, and not for services - and described the potential for "extremely aggressive" countermeasures. Ireland, Italy, and Spain, have urged a more cautious and de-escalatory response, warning that targeting U.S. tech giants could represent an extraordinary escalation.
Europe’s digital infrastructure - compute, cloud, AI tooling, capital - remains deeply integrated with the U.S. If Europe targets the digital economy in its retaliatory strategy, the escalation could cause severe collateral damage to the continent’s innovation economy. The casualties may be the European investors and entrepreneurs who have been battling for the past decade to build the economy of tomorrow.
What just happened - and why it matters
Trump’s tariff regime is sweeping. Announced on April 2, it introduces a 10% baseline import tariff, with additional 'reciprocal' surcharges ranging from 20% for the EU to 34% for China. Markets reacted sharply after the Liberation Day announcements: Nasdaq dropped 6%, the S&P 500 fell 4.8%, and the dollar slid against the euro. More significantly, confidence cracked. Even if digital products aren’t taxed, the uncertainty is damaging.
The situation is evolving rapidly. By April 9, Washington had already rowed back and reduced tariffs to 10% for many countries (most prominently excluding China) for 90 days. On April 11, a further twist followed: the White House temporarily exempted several tech devices - including smartphones, laptops, and routers - from tariffs. But this apparent reprieve came with a sting. At the same time, the administration launched a new national security investigation into semiconductor imports, a move that could lead to fresh tariffs of 25% or higher on one of the most critical inputs in the global tech stack.
The direct pain points are already showing
Hardware-based startups are the first hit. European tech companies exporting physical products - even if bundled with software or data services - are immediately affected by the new tariffs. Moreover, the EU's retaliatory tariffs, may lead to increased costs and supply chain disruptions for European businesses relying on these imports. US companies and users alike will face cost increases, but potentially also delivery delays and blocked shipments. Customs issues will become more frequent, a phenomenon that European and UK companies might have adapted to post-Brexit, but US companies will still need to adjust.
But software companies are not exempt. Some tech companies have warned that pricing shifts in U.S. cloud infrastructure used in Europe - AWS, Google Cloud, Microsoft Azure - could directly affect their regional business model. Tech companies relying on dollar-priced AI computing power, cloud services or software licenses are particularly vulnerable.
The indirect fallout is just beginning
Beyond tariffs, the broader effects will be felt quite rapidly:
- LPs and VCs could redirect capital: Several founders have reported U.S. investors asking about tariff exposure and reconsidering non-domestic allocations. The same applies to large asset allocators, especially for capital that is sourced locally and deployed internationally.
- Funding timelines may shift: With interest rates expected to stay higher for longer to counter inflationary pressure as well as the “volatility” of political decision and “un”-decision making, the late-stage phase might become “the valley of death” as investors remain cautious and companies have to delay growth rounds and IPOs plans into 2026.
- Hiring and location strategies might evolve. Some recruiting platforms have observed growing U.S. hiring interest in Canada as a hedge. Some startups are reviewing Delaware flips or U.S. incorporation as defensive moves.
- “Physical” customer verticals could be at risk: Retail, luxury, and automotive - critical revenue segments for European SaaS - may face macroeconomic pressure, as the US customers might become less perceptive to them, as well as their European customers in these segments are targeted tariffs, leading to increased cost pressure that might see software procurement postponed, halted or outright cancelled.
Founders are already preparing
Strategic responses are underway: “Sovereign projects” are a priority for many European governments but now increasingly so for the private sector too. More tactically, tech companies should at least review tax and legal implications to assess risks and develop mitigations.
While operating expenses might not be impacted significantly for now, the cost of goods sold / cost of service will: Especially cloud and AI computing cost to deliver services are highly hardware intensive. With a potential of at least 25% tariff looming over semiconductor imports, hardware cost inflation will hit cloud providers first - and their customers next. US hyperscalers will almost certainly pass these costs downstream. This will erode gross margins and increase pricing pressure for tech companies across Europe and beyond.
Europe must act - but not expand trade wars into the digital economy
This is not the time for retaliation. It is the time for realism. Some voices in Europe argue that the U.S. tech sector should be targeted in return - but that would be self-defeating. Europe is not just exposed to American services and software products; it is dependent on them. In services trade, the EU ran a €108 billion deficit with the U.S. in 2023, driven heavily by digital services, cloud infrastructure, and enterprise software. These are not segments where Europe can easily substitute or diversify - there is no European AWS, no European Nvidia, no equivalent suite of AI development tools.
Unlike physical goods, where alternatives exist - we can buy electric vehicles from China - there is no competitive global market for the kind of elite digital services provided by the U.S. tech sector. Escalating the trade war into this domain would not create leverage. It would expose a strategic vulnerability Europe has yet to address.
Calls from ECB President Christine Lagarde and tech industry associations, like France Digitale, underscore the point: Europe must accelerate its autonomy in infrastructure, funding, and regulation - not by closing doors, but by building its own.
Policy proposals already circulating include:
- A European bonus for public procurement aligned with EU environmental, social, and geopolitical standards
- Coordinated DST enforcement
- Sovereign investments in compute, chips, cloud, and security infrastructure
- Clearer lines of engagement with customs authorities for export-facing scaleup
None of this requires mimicking Trump’s tactics. But Europe must make it materially easier and safer to scale globally without being caught in the crossfire. Also, initiatives that have long been on the agenda, have gained higher materiality and need to be accelerated: Redrafting regulatory frameworks to free up existing capital of insurance institutions, pension funds, etc., Or, even more prominently, the capital markets union: a project that has seen astonishingly little progress although it has nothing but supporters, at least in public.
A fragile balance and a call for resilience
The opening shots of a potential global trade war have been fired. But where can it go from here?
It could end in compromise - perhaps even by design. According to voices close to the U.S. Treasury, the tariffs are not just economic weapons, but deliberate levers to force new negotiations. Washington may be betting that ad hoc deals will contain the fallout and allow the Fed to pivot within months. But this is a high-stakes gamble with global consequences.
For Europe, the greater risk lies not in what Washington does next, but in its own inability to respond with clarity. A fragmented EU reaction, economic deceleration, and political volatility could open the door to populist outcomes that markets will not easily digest, especially on the back of a reflaming inflation. The digital economy was not built for borders - but it is now vulnerable to them.
Europe cannot afford to remain reactive. The time for white papers and cautious consensus is over. We have the innovators in Europe to build the essential enablers of the next wave of technological innovation - from hyperscalers and AI infrastructure to developer tools and enterprise platforms. But to do so, we must activate political resolve and mobilize long-term capital behind these efforts. That means financing founders and companies not just building great products, but strengthening Europe’s strategic resilience. We started Revaia over five years ago with the ambition in mind to back truly exceptional European founders at the critical late-growth stage. And we continue investing with the same conviction: to help build a stronger Europe that can weather any storm.
We in Europe must act - strategically and at scale - to secure our footing in AI, compute, defense, and capital. Otherwise, Europe may not just lose the next phase of the digital race - it may no longer qualify to run in it.
If we choose to see this not as a threat but as a historic opportunity to rely on ourselves and believe in our capabilities, we can build the infrastructure, tools, and applications that are globally competitive when markets open up again - or create greater resilience if they do not.