Italy’s ancient towns and cities, with their narrow, cobbled streets, offer an obvious explanation why, in the words of US President Donald Trump, Europeans “don’t take our cars”.

Or as car industry analyst Hampus Engellau puts it: “Try to go around Italy in a big SUV. I’ve done it, and it’s very difficult”.

Add cost to the question, and it becomes obvious why you don’t see too many American pick-up trucks on European roads, observes Mike Hawes, CEO of The Society of Motor Manufacturers & Traders, which represents the industry in the UK.

“We tend to have higher fuel prices than the Americans, so we prefer smaller, more fuel-efficient vehicles, while they generally prefer larger vehicles.”

Mr Engellau, who works for Swedish investment bank Handelsbanken Capital Markets, also highlights petrol prices being substantially cheaper in the US. “They pay per gallon what we pay per litre,” he says. There are 3.8 litres to one US gallon.

Yet these differences have done little to deter European carmakers from gaining market share in the US. Again, in the words of Mr Trump, the US has “millions of cars coming in – BMW, Mercedes, Volkswagen and many others”.

In 2022, 692,334 new EU-made cars were exported to the US, worth €36bn ($37bn; £30bn). While only 116,207 new US-made cars went in the opposite direction, for €5.2bn.

This imbalance is caused by unfair trading rules and needs correcting, according to Mr Trump.

“Mr Trump is concerned because the terms of trade are not really equal,” explains Mr Engellau, pointing out that the EU’s 10% tariffs on cars imported from the US far exceeds the 2.5% tariffs the US – currently – charges on cars imported from the EU.

These disparities have prompted Trump to say he wants to raise US tariffs on European automotive imports. He has already announced 25% import tariffs on steel and aluminium imports, two metals crucial for carmakers.

Trump’s move appears to have prompted EU officials to consider reducing their own tariffs in order to protect Europe’s automotive industry from a potential trade war.

Trump’s intervention has not impressed Jim Farley, the boss of US carmaker Ford. “So far what we’ve been seeing is a lot of cost and a lot of chaos,” NBC News recently reported him as saying.

In fact, the very focus on trade is perhaps misplaced, according to automotive industry veteran Andy Palmer, formerly the chief operating officer of Nissan and CEO of Aston Martin, and currently a consultant. “If you can help it, you don’t want to ship cars around the world. They’re big boxes of expensive air,” he says.

The automotive industry is global, adds the SMMT’s Mr Hawes, so carmakers generally want to “manufacture close to where the customer is based”.

As such, several European carmakers, most notably marques such as BMW, Mercedes and Audi, are making some of their largest cars in North America, and some of these vehicles are exported back to Europe.

US carmakers have historically pursued similar strategies in Europe. General Motors owned and manufactured European marques such as Opel/Vauxhall and Saab, but it sold the former in 2017, and shut the latter back in 2009.

Meanwhile, Ford offloaded Aston Martin in 2007, Jaguar and Land Rover in 2008, and Volvo in 2010.

After years of losing money, Ford is currently redirecting its European business towards electric and commercial vehicles and away from small, affordable cars, such as its Focus models.

Ford plans to cut 800 jobs in the UK and 2,900 jobs in Germany by 2027, which represents a 14% reduction in its 28,000-strong European workforce.

Elon Musk’s Tesla has a factory near Berlin in Germany, where it makes its Model Y cars for the European market, but even here there are headwinds as low-cost Chinese imports in particular see their share of Europe’s market for electric cars grow.

Europe is a very tough marketplace for carmakers, according to Jose Asumendi, head of European automotive research at JP Morgan, an investment bank. “You need to have the right products, and you need to run the manufacturing plants well.”

He also points to brands having a competitive advantage in their home countries, be it BMW, Mercedes, Volkswagen and Audi in Germany, Peugeot, Citroen and Renault in France, or Fiat and Alfa Romeo in Italy.

“There’s a natural inclination for people to buy local champions, especially in Germany, France and Italy,” explains Mr Asumendi.

He adds that while other European countries are more open to different brands, the market is crowded, with a slew of Japanese, South Korea, and, increasingly, Chinese cars.

Adding to Europe’s complexities for overseas carmakers are different taxation regulations, and the need to communicate in many different languages.

Mr Palmer does not think “European customers have any particular objections to American cars”, and Mr Asumendi agrees. “I think Europeans do like American brands, but there are many other brands available in Europe, so competition is fierce,” he says.

Mr Trump’s ambition is to make the US car industry stronger, by bringing more production and innovation home. But Mr Palmer insists that a car trade war with Europe will not deliver this.

Not least, he says, since tariffs tend to “insulate the beneficiaries from the free market, and this merely makes them lazy, so they stop innovating and fail to remain competitive”.

“It’s not about trade,” adds Mr Palmer. “It’s about investment and collaboration.”

The German and French stock markets were down about 2%, with shares in carmakers among the worst hit, while London’s FTSE 100 dropped more 1%.

The US dollar also strengthened on the currency markets, rising to a record high against China’s yuan, while the Canadian dollar plunged to its lowest level since 2003.

Investors are bracing for a turbulent period that could hit the earnings of major companies and dent global growth.

Canada and Mexico are facing tariffs of 25% on their exports to the US. Chinese-made goods will face a 10% levy, in addition to existing tariffs.

Canada and Mexico have said they will hit back with retaliatory tariffs while China promised “corresponding countermeasures” and vowed to challenge Trump’s move at the World Trade Organization.

Trump has said the tariffs are necessary to halt the flow of illegal drugs and immigration into the US.

And on Sunday night, he said he would “definitely” impose tariffs on the EU, although he said while the UK was “out of line”, a deal could be worked out.

“Investors are rattled at the prospects of a full-blown trade war breaking out,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Shares in carmakers saw the biggest falls as it is seen as the sector most at risk from disruption from the tariffs.

In Japan, Toyota shares fell 5% and Honda sank 7.2%, while in Europe shares in Stellantis – whose brands include Chrysler, Citroen, Fiat, Jeep and Peugeot – were down 7% and VW dropped 6%.

Shares in drinks maker Diageo – which exports tequila from Mexico to the US – fell 3%.

Russ Mould, investment director at AJ Bell, said there was a “sea of red flashing on the markets”.

Tariffs could lead to “higher inflation and put a stop to further interest rate cuts for the time being – exactly the opposite of what equity investors want to happen”, he added.

“Higher prices could hurt demand, and there might be a trickle-down effect that knocks business and consumer confidence and feeds into weaker economic activity.”

The prospect of interest rates staying higher for longer helped to strengthen the dollar.

As well as the dollar rising against China’s yuan and the Canadian dollar, the euro fell to more than a two-year low against the US currency.

Oil prices also rose following news of the tariffs, as traders tried to analyse how tariffs on Canada and Mexico – the two biggest sources of oil imports to the US – would affect the market.

The benchmark Brent crude oil price was up about 1% at $76.50 a barrel.

The tariffs announced by the Trump administration over the weekend target the United States’ three largest trading partners.

Chief investment strategist at investment bank Saxo, Charu Chanana, warned that while tariffs could be beneficial for the US economy in the short term, in the long run they pose significant risks.

“Repeated use of tariffs would incentivise other countries to reduce reliance on the US, weakening the dollar’s global role,” she added.

Trump has said he will speak to Canada and Mexico’s leaders on Monday about the tariffs, which are due to come into effect at midnight on Tuesday.

But strains are showing in “Team Canada” when it comes to whether energy supply should be a tool in a possible tariff war with the US.

President-elect Donald Trump, who takes office on Monday, has threatened to immediately impose levies on Canadian goods in an effort to force the country to crack down on illegal immigration and drug smuggling into the US.

On Wednesday, Canadian Prime Minister Justin Trudeau met provincial and territorial premiers to discuss the country’s coordinated response.

“Nothing is off the table,” Trudeau said at a news conference with the premiers after the day-long meeting.

“What we’ve agreed on is we have to respond to the challenge we’re facing and that the burden is shared across the country.”

“We will stand up for Canada, we will protect Canadians,” he added.

The prime minister also said there would “absolutely” be support for sectors affected should the tariffs materialise.

Roughly 75% of Canadian exports go to the US, and economists say the levies would be devastating for the country.

Canada is preparing a number of counter measures should the Trump administration move forward either with a blanket 25% levy on all goods or with a more targeted approach.

Canadian legislators have been lobbying US counterparts in recent weeks in a bid to avoid the tariffs, including personal visits to Trump’s Mar-a-Lago resort in Florida.

Ottawa also promised to implement C$1.3bn ($900m; £700m) in sweeping new security measures along the country’s nearly 9,000km-long (6,000 mile) border with the US to allay some of Trump’s concerns.

But there has been a growing worry that the tariffs – at least in some form – are inevitable.

Trump has long been a proponent of trade tariffs, calling them the “greatest thing ever invented”.

They are a central part of his economic vision. He sees them as a way of growing the US economy, protecting jobs and raising tax revenue.

Canadian officials argue they would undermine the US economy, increase inflation for American consumers – including raising prices at the petrol pump – and hamper investment.

They also warn tariffs could undermine national security, given Canada, a US ally, is a key source of energy and critical minerals.

• Canada’s oil patch rattled by Trump’s tariff threat
• Trump tariff threat puts a strain on Canada-Mexico ties

While there has been a push for a unified approach to the threat, cracks in the coalition were apparent on Wednesday.

Alberta Premier Danielle Smith did not sign the joint statement released after the meeting, which she attended virtually.

On social media, she said the oil-rich province will not agree to export tariffs on energy or other products, or a ban on their exports.

“We will take whatever actions are needed to protect the livelihoods of Albertans from such destructive federal policies,” she said.

Trudeau and the premiers of Ontario, Quebec, and Newfoundland are among those open to either imposing counter tariffs on energy or cutting off energy exports to the US.

“I see energy as Canada’s queen in this game of chess,” said Newfoundland and Labrador Premier Andrew Furey prior to the meeting.

“We don’t need to expose our queen too early. The opposition does need to know the queen exists but they don’t need to know what we do with the queen.”

Around 40% of the crude that runs through US oil refineries is imported, and the vast majority of it comes from Canada.

It also supplies the US with natural gas and electricity.

“We’re all united in that we have to act in the robust way,” said Trudeau when asked about Smith’s response.