EU’s Innovation Gap Widening Under Trump’s Trade and Tax Policies

The trade and tax policies implemented by Donald Trump are poised to significantly widen the innovation gap between the European Union and the United States by 2026. Companies operating within the EU have voiced concerns that the bloc’s efforts to deregulate its markets are insufficient to counteract Trump’s dual strategy of offering substantial tax incentives while imposing a punitive 15% tariff on imports from the EU.

As 2025 draws to a close, EU policymakers in Brussels have not yet effectively addressed the negative economic repercussions stemming from two critical events: the trade deal established between the EU and the US in summer 2025, and Trump’s “Big Beautiful Bill,” a major piece of domestic legislation with far-reaching global economic consequences. This sluggish response has left investors feeling frustrated, prompting many to seek opportunities outside of Europe.

According to a recent report by the European Round Table for Industry, leaders of the EU’s industrial giants express alarm over the slow pace of reforms promised by EU officials Mario Draghi and Enrico Letta. A survey of CEOs conducted in October reveals that only 55% anticipate maintaining their investment plans, while a mere 8% intend to increase their investments in Europe. This contrasts sharply with 38% of CEOs who plan to invest less than initially intended or have paused their decisions altogether. Notably, 45% of respondents indicated that they now expect to invest more in the US than they had originally planned.

The “carrot-and-stick” approach adopted by the Trump administration combines supply-side economics with protectionism, creating a compelling incentive for foreign companies and multinationals to invest directly in the US. The recently signed Big Beautiful Bill formalises substantial tax breaks, including 100% bonus depreciation for new machinery and factories, along with immediate expensing of domestic research and development (R&D) costs. These measures effectively mitigate the expenses related to moving production and innovation across the Atlantic.

Companies have until January 1, 2026, to finalize their investments and benefit retroactively for capital deployed in 2025. Importantly, the same favorable conditions will persist into the next year. This situation is compounded by the controversial EU-US trade deal that was finalized in the same month, which, while de-escalating the trade war, imposes a 15% tariff on most EU industrial exports to the US, while exempting many US-made goods from tariffs when entering the EU market.

In addition to this, the EU has committed to investing over €640 billion in US energy, more than €500 billion into the US economy, and purchasing around €35 billion worth of US-made AI chips, all before the end of Trump’s presidency. The US, in contrast, has made no reciprocal investment commitments.

The implications for innovation are stark. The Trump administration’s policies are siphoning off vital R&D resources, threatening Europe’s long-term competitiveness. In 2025, private investment in US AI companies surpassed €100 billion, with the US capturing over 80% of global AI funding. In comparison, the EU attracted just under €7 billion, according to the State of AI Report 2025. This funding disparity of 15-to-1 raises concerns about the technological advancements being developed predominantly outside the EU.

The EU aims to secure a 20% market share in semiconductor manufacturing by 2030, as outlined in its Chips Act. Yet, experts suggest this goal is unlikely given the slow growth rates within Europe’s semiconductor sector. Furthermore, a recent survey by the Organisation for Economic Cooperation and Development indicates that the EU is lagging behind in AI adoption among younger users.

In the pharmaceutical sector, CEOs have issued urgent warnings to Ursula von der Leyen, President of the European Commission, indicating that without swift and radical policy changes, pharmaceutical research and development will increasingly shift to the US. This sentiment has been echoed by Swiss-based Roche, which announced a commitment of over €40 billion in US investments over the next five years. Similarly, French multinational Sanofi has pledged €17 billion to expand manufacturing in the US through 2030.

In a further indication of this trend, British-Swedish company AstraZeneca announced an investment of over €40 billion in the US within the same timeframe, including plans for a chronic disease research center in Virginia, marking its largest single investment in a facility to date. In November, the White House revealed a significant agreement between pharmaceutical companies Eli Lilly and Novo Nordisk, with Novo Nordisk committing approximately €8.5 billion to enhance US manufacturing capacity in exchange for a three-year exemption from US tariffs.

The European pharmaceutical industry has collectively pledged over €100 billion for US expansion in 2025 alone, reflecting a trend of multi-year commitments towards the US market.

In response to increasing US pressure, the European Commission has begun to pursue an aggressive deregulation agenda. Since February, six simplification proposals, known as “omnibus” initiatives, have been presented covering various sectors, including energy, finance, and technology. Notably, the Digital Omnibus introduced in November includes delays to certain provisions of the AI Act and modifications to the GDPR, aiming to cut red tape and reduce bureaucratic costs for European businesses.

Despite these efforts, the proposed measures are still facing legislative scrutiny and political backlash from privacy and climate advocates. Recently, an agreement was finally reached on the first omnibus, highlighting that the EU remains far from providing the immediate financial certainty necessary to minimize or avoid US tariffs while attempting to benefit from Trump’s policies.

The current numbers illustrate a clear economic reality: while the EU deliberates over the intricacies of deregulation, investment in innovation is decisively shifting to the United States.