The European Union (EU) could face a significant economic setback if former US President Donald Trump follows through on his threat to impose new tariffs. A 25% tariff on EU exports to the US could reduce the bloc's GDP by 0.33% in the short term, with long-term impacts potentially reaching 0.87%, according to new analysis.
Trump is expected to announce further trade tariffs on 2 April, a day he has described as a "liberating day" for America. Given that the US is the EU's most important trade partner, concerns are rising across the continent. The EU exported goods worth €504 billion to the US in 2023, accounting for 20% of all extra-EU exports. Of these, €158 billion—31% of total EU exports to the US—came from Germany, making it the most exposed economy.
While the immediate impact of tariffs is expected to be a GDP reduction of 0.33%, experts warn that this could rise significantly over time. The analysis highlights that a 25% tariff could decrease EU exports to the US by 19%. 'While that might sound marginal, when your economies have been stagnating for months, if not years, the cost will be considerable. And could rise even more overtime,' the report states.
Short and long-term economic consequences
The short-term effects (1-2 years) include:
A direct reduction in EU exports due to higher costs for American consumers.
A 0.33% drop in EU GDP due to decreased trade.
Potential knock-on effects on financial markets and investor confidence.
In the long term, the economic hit could be even greater:
The GDP decline could rise to 0.87%.
American consumers and producers may shift towards alternative suppliers.
Job losses in the EU could lead to reduced consumption and lower investments, exacerbating the downturn.
Country-level exposure
Germany and Italy are among the most vulnerable economies, with US trade accounting for 2.1% and 2% of their GDP, respectively. Ireland is particularly exposed, with 46% of its extra-EU trade going to the US, translating to a 9.7% GDP exposure. In contrast, Spain (1.1%) and France (1.1%) have comparatively lower direct economic ties to the US market.
Trade between the EU and the US primarily consists of pharmaceuticals, cars, machinery, and chemicals. The tariffs would likely disrupt supply chains and force companies to explore alternative trade routes, but such adjustments take time.
Challenges in assessing the full economic impact
Estimating the complete impact of the tariffs is complex due to the indirect exposure of EU economies. Many smaller EU nations, such as Belgium and Austria, contribute less domestic value-added to exports than larger economies like Germany. Additionally, trade with intermediary partners such as Canada, Mexico, and China could further complicate the economic consequences.
While Trump's upcoming announcement remains uncertain, the stakes for the EU are undeniably high. The potential tariffs could deepen existing economic stagnation and create long-term structural challenges for European industries. More clarity is expected on 2 April, when further details of the US trade policy shift are likely to emerge.
More information:
ING
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