Trump's Liberation Day: an epochal change

That is around 1.2 per cent of annual Gross Domestic Product (GDP) on average for the years 2025 to 2028. However, if trading partners respond with similar measures, the costs could rise to cumulated costs of around 290 billion euros or an annual average of 1.6 per cent of GDP per year. For the EU, the cumulative costs over four years amount to 780 billion euros or 1.1 trillion euros - depending on the scenario. The impact of the adopted tariffs is even higher in relative terms for developing and emerging countries. For example, Vietnam is likely to experience an average annual loss of 5.2 per cent of GDP in the four years to 2028 if there are no retaliatory measures, or average annual loss of 6.3 per cent in the scenario with retaliatory tariffs. It was assumed that the reciprocal tariffs apply to all imports into the USA on a country-specific basis; exceptions for individual products with differing tariffs were therefore not taken into account in the simulations. The announced reciprocal tariffs have been suspended for 90 days, but the uncertainty remains high and is a large impediment for investment planning worldwide. Moreover, the US trade conflict with China continues to escalate, with negative consequences for the entire global economy. US tariffs of 145 per cent on all Chinese goods are likely to cost the German economy 150 billion euros over the four years to 2028 in total. China’s reaction with retaliatory tariffs of 125 percent raises the costs for the German economy to around 200 billion euros cumulated of the years 2025 to 2028.

The tariffs cannot be justified economically. The formula used by the Trump administration is highly problematic and assumes an academically implausible reaction of import prices to higher tariffs. Realistic values would result in significantly lower tariffs. It is also problematic to assume that other macroeconomic variables such as exports and exchange rates will not react to higher tariffs. Furthermore, the cause of the existing deficit in the trade and current account balance of the US is, falsely, blamed on tariffs. The fact that the US has a significant surplus in trade in services and also in primary incomes with the EU which is not taken into account. It is also ignored that the US deficits in goods trade and in the current account are due to a persistently high surplus in the capital account. These structurally positive net capital imports are due to the role of the US dollar as a global reserve and transaction currency and to high US government budget deficits. An aggressive tariff policy will not change this, so the US trade deficit will remain and only shift to other countries.

This makes it all the more important for the EU to react prudently but with strength and to hold out the prospect of painful countermeasures. These should also include services, because the US has a high surplus with the EU in this area and is more vulnerable than in trade in goods. This applies in particular to charges for the use of intellectual property, where the US has a particularly large surplus. Imposing trade barriers here can put pressure on the USA. However, as this is new territory in terms of trade policy, the impact on the European economy must first be analysed in more detail. Another consideration is to target digital companies in the USA. The EU can implement countermeasures within the framework of two instruments that were adopted after the first Trump administration - the Enforcement Regulation and the Anti-Coercion Instrument.