By Georgi Kantchev

Once veiled behind the Iron Curtain, Eastern European nations have transformed into automotive powerhouses, churning out Porsches, Audis and even key parts for iconic American pickup trucks.

But President Trump's trade policies are exposing the fragility of their economic model and jeopardizing growth, factory jobs and standards of living across the region. After imposing 25% tariffs on car imports in April, he escalated tensions on Friday by threatening a 50% tariff on all goods from the European Union before backtracking over the weekend and pushing the deadline to make a deal to July 9.

The tariffs have already dealt a blow to Europe's automotive sector. Giants such as Germany's Volkswagen, BMW and Mercedes-Benz, alongside luxury brands in the U.K. and Italy, make up a big chunk of Europe's exports to the U.S.

The economic impact, however, is expected to be even harsher in Central and Eastern Europe, where countries often have smaller, less diversified industrial bases. In Slovakia, the world's largest car producer per capita, the auto sector constitutes as much as 50% of industrial production, compared with around 20% in Germany. Cars make up three quarters of total Slovak exports to the U.S.

The vulnerability isn't just a matter of direct U.S. sales -- it is amplified by the region's integration into broader international supply chains, especially in countries such as the Czech Republic and Hungary. This means that weakening demand in Western Europe or decisions by multinational companies to relocate production can have significant ripple effects.

A decade ago, Erce Kaslioglu, founder of Turkish maker of car interiors Mata Automotive, opened a factory in Slovakia -- a small, landlocked country in Central Europe -- which was then becoming known as "Europe's Detroit." The U.S. quickly emerged as his biggest market. Business has been brisk and he recently expanded the factory with two new buildings.

Now he is reducing output in Slovakia and moving a production line for hundreds of thousands of interior parts for Ram Trucks to his operations in Mexico, which has exemptions under the U.S.-Mexico-Canada Agreement.

"It's becoming a nightmare for us, for our suppliers and for our customers," said Kaslioglu, who is currently racing to find European customers for his U.S.-geared Slovak factory. "The tariffs are going to slash the profitability significantly."

Many in Eastern Europe's automotive heartlands share his bleak outlook.

Business surveys in Slovakia show that car companies' expectations for future production dropped in April to their lowest level in almost two years. Some exports there have already been suspended in response to the imposition of U.S. tariffs, according to the European Commission. Production expectations also fell precipitously in the Czech Republic and have been negative in Hungary since Trump's election. Notably, the downturn in Slovakia and Hungary comes despite their populist governments being among Trump's most vocal supporters in Europe.

Peter Ka imír, governor of the Slovak central bank, called the trade wars "a little European and American Armageddon."

"Tariffs mean weaker economic growth, a threat to the positive mood on the labor market, and, of course, a certain impact on prices," he said last month. "This is not good news for the economy."

The new tariffs exacerbate the existing uncertainties faced by the European automotive industry, which is already grappling with the shift to electric vehicles and intense competition from Chinese manufacturers. Taken together, those pressures complicate long-term investment decisions for European carmakers and challenge the continent's status as an automotive manufacturing hub.

The direct trade impact will mean "lower U.S. demand for European goods and lower European household incomes," said Jan Bureš, senior economist at Prague-based CSOB bank. "The negative effect of the uncertainty will impact business confidence and willingness to invest."

Europe's eastern flank had been one of the biggest winners from globalization. With the fall of communism, Central and Eastern European nations leveraged their existing, if antiquated, automotive industries. Attracted by skilled yet affordable labor and government incentives, Western investment poured in, integrating these fledgling car industries into global supply chains. Factories that once produced tanks and Soviet Ladas began manufacturing Western-designed cars, reaping significant economic benefits and raising living standards.

But now this success story -- akin to the rise of Mexico as a manufacturing hub -- is under threat.

"Central and Eastern European countries have significantly benefited from globalization, EU membership and the development of free trade, but they are now becoming some of the most vulnerable to the negative impacts of current developments," said Matej Hor ák, senior analyst at Bratislava-based bank Slovenská Sporite a.

Slovakia was one of the early beneficiaries, with Volkswagen and then Peugeot, Hyundai Motor's Kia and Tata Motors' Jaguar Land Rover all establishing production there. The automobile industry now accounts for around 10% of gross domestic product and employs more than 300,000 people in a country of around five million.

Now, the Slovak central bank estimates that the trade war will wipe out nearly all growth, at least 20,000 jobs and 5 billion euros in exports over the next three years -- forecasts made before Trump's new tariff threats.

In the Czech Republic, the tariffs will hit hard makers of auto parts, especially those selling to Germany, leading to fewer exports and lost business, the Czech Automotive Industry Association said. Analysts at Prague-based KB-Bank said in a recent report that the economy will enter a recession in the second half of the year due to tariff pressures.

In Hungary, the tariffs will likely delay the launch of new car factories as trade uncertainty has a "paralyzing effect on investment decisions," according to a recent report by the European Bank for Reconstruction and Development.

Bence Pinter, the mayor of the northern Hungarian city of Gyor that houses a large Audi factory, wrote in an April open letter to the government that U.S. tariffs were "strangling the Gyor automotive industry." He urged authorities to negotiate tariff relief with Washington or seek compensation.

"The current situation is serious and may become critical quickly," the mayor wrote.

Write to Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

May 28, 2025 19:00 ET (23:00 GMT)

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