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U.S. President Donald Trump has announced his intention to impose 25 percent tariffs on European goods, particularly targeting the auto sector. His statement has raised the specter of a renewed transatlantic trade war that could have significant economic repercussions for both sides of the Atlantic. The Kiel Institute's KITE model (https://www.ifw-kiel.de/institute/research-centers/trade/trade-policy/kite-kiel-...) simulations show that such measures would lead to economic contraction in both the EU and the United States, while also driving inflationary pressures.
According to the simulations, the European economy would shrink by an average of 0.4 percent in real GDP terms within the first year, a significant impact for a short-run scenario. The U.S. itself would not be spared, experiencing a contraction of 0.17 percent. Should the EU retaliate with its own 25 percent tariffs, the economic damage to the U.S. would double and increase own costs for the EU by another 0.14 percentage points. Furthermore, price levels in the U.S. could increase by up to 1.5 percent due to higher costs for imported final goods and intermediate inputs, making domestic production more expensive and reducing overall competitiveness.
European exports to the U.S. would decline sharply even in the first year of such measures, with an average drop of 15–17 percent, and Germany seeing a decrease of up to 20 percent. This would translate into a drop of 1.5 percent of Germany's total exports. Within Germany, the manufacturing sector would be the hardest hit, with nominal production e.g. in the automotive industry to decline by as much as 4 percent.
"These tariffs would not only strain transatlantic economic relations but also drive up costs for U.S. consumers and manufacturers," says Julian Hinz, Research Director for Trade Policy at the Kiel Institute. "The significant increase in production costs due to higher-priced imported inputs could undermine U.S. competitiveness and fuel inflation, ultimately harming American businesses and consumers alike."
The risk of escalation between the U.S. and the EU remains high, with the European Commission already signaling its intent to react firmly should Trump proceed with the tariffs. This raises concerns over prolonged economic uncertainty, as businesses face difficulties in long-term planning and investment due to the unpredictability of U.S. trade policy.
"The uncertainty surrounding which of these measures will actually be implemented makes it difficult for businesses to plan ahead. This unpredictability alone could slow investment, disrupt supply chains, and dampen economic growth on both sides of the Atlantic," Hinz says.
Further simulations can be found in our dossier on tariffs and trade wars: https://kiel.institute/tariffshttps://kiel.institute/tariffs.
Media Contact:
Mathias Rauck
Chief Communications Officer
T +49 431 8814-411
mathias.rauck@ifw-kiel.de
Kiel Institute for the World Economy
Kiellinie 66 | 24105 Kiel | Germany
Chausseestraße 111 | 10115 Berlin | Germany
T +49 431 8814-1
E info@ifw-kiel.de
www.ifw-kiel.de
Prof. Dr. Julian Hinz
Director Trade Policy
T +49 431 8814-507
julian.hinz@ifw-kiel.de
Short-run changes in real GDP (in %)
Kiel Institute for the World Economy
Short-run changes in exports to USA (in %)
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