After Trump decided to postpone the 50% import tariff on European products from June 1 to July 9, a potential recession appears to have been temporarily averted. Gilles Moëc discusses the potential consequences for the global and European economies if Trump goes through with the tariffs on July 9.
Gilles Moëc, AXA Group Chief Economist and AXA IM Head of Research, elaborates on the potential consequences for the EU of the 50% trade tariffs imposed by Donald Trump. “What the thought was the most striking aspect of the market reaction on Friday to Donald Trump’s threats to impose a 50% tariff on EU products – enforceable from June 1st - is that the dollar continued to weaken. On Friday evening the euro stood at 1.1362 dollar, against 1.1283 on Thursday night. This goes against theory: for all their limitations and adverse side-effects, tariffs should still reduce a country’s trade deficit, thus lifting its currency. We suspect that this market response reflects a general distaste among investors for the constant bombardment of new, potentially far-reaching policy measures in the US which only add to the “risk premium” now associated with US assets.
Of course, a 50% tariff on EU products would have a significant impact on the European economy. In the various iterations of the trade war scenario, we never considered a shock of such magnitude, but models are linear. If this was the permanent state of play, and in a configuration where the EU would respond by imposing tariffs of 25% on US products (which would be sufficient to inflict damage to the US while limiting the side-effects for Europe), we estimate that GDP would fall by 1.6% relative to baseline in the Euro area. If we add to the mix a stronger euro – maintaining the 5% gain in trade-weighted terms observed since the beginning of the trade war – the GDP loss would reach 2%. In other words, a serious recession would ensue, given the already mediocre current dynamics.
While it may be asymmetric, the shock to the US economy of such a massive hike in custom duties levied on European products would however be large, bringing in alone a contribution of 9.3 percentage points to the weighted average tariff, given the EU’s share in US imports (18.5% in 2024, versus 13.4% for China), which would take it back again above 20%, enough to lift inflation by more than 2%. According to the Yale Budget Lab, if the 50% tariff on EU products was permanent – as well as all other tariffs currently in the pipeline - US GDP would be immediately 0.8% lower, with a long-run cost of 0.5%. Retaliations would also be painful for the US. Even if the US is a much less open economy overall than the EU, Europe is a much bigger market for American producers than China: the EU last year received 18% of US exports, more than twice the share of China (7%). In other words, a 25% European tariff has the same overall effect on the US competitiveness as a 65% Chinese tariff.
The immediate reactions on the EU side were not indicative of an intention to “fold” too easily, even if an open attitude towards the US continues to prevail. A common calculation in Washington is that Europe’s negotiation position can be easily undermined by playing member states against one another. Still, based on the various statements of the weekend, there does not seem to be any visible cracks in the European resolution. We find it interesting that the Dutch Prime Minister Schoof – who in early April was calling for restraint on the EU’s handling of the trade war –merely stated after Donald Trump’s announcements “this is all part of the negotiation; we will look calmly at the proposals and respond robustly and firmly"
