Tariff threats towards Europe become more concrete

Yesterday evening, Trump gave a number of remarks about his tariff plans for Canada, Mexico and the EU. When asked whether the fentanyl and immigration related tariffs on Canada and Mexico would be enacted next week, he said they were planned for April 2nd, after which Secretary of Commerce Lutnick clarified these measures were still planned for March 4th, while the overall tariff package is planned for April 2nd. Trump had previously threatened EU tariffs, and was asked to be specific. He said these too would be 25%, as the EU was formed ‘to screw’ the US. After the meeting, White House officials stepped in, and reiterated the deadline for Canada and Mexico was still March 4, with no formal extension given. They also added that for the EU, all options are being considered, from universal tariffs to certain products or sectors, but no decisions have been made.

We have published on the panoply of tariff threats in two notes recently, one giving an overview of tariff threats and another focused on the eurozone and Dutch economy impact. In this note we focus on Trump’s new threat of a 25% tariff on EU imports. While there is still great uncertainty about the scope, Trump clearly hinted at a general tariff of 25% for the EU, similar to one threatened on its other major trading partners Canada and Mexico. Given the similarity of these tariff threats, it is difficult to treat them in isolation, so we consider scenarios where either of the threats, or both are implemented. As usual, the impact of these measures broadly scale with the value of goods affected. Mexico and Canada jointly account for about 28% of imports, while the EU makes up 18%.

US: Tariffs would drive a significant slowdown and higher inflation

For the US, the growth and inflation impact of the Canada/Mexico threat is relatively larger compared to the EU threat, due to the more integrated supply chains, which will be heavily disrupted. The joint impact is more than the sum of its parts, as it severely limits the scope for substituting imports with goods from the other major trading partners. We estimate a growth impact of about 0.9% from the Canada/Mexico tariff, 0.5% from the EU tariff, and almost 1.7% from the joint tariff. Core PCE inflation would get a 0.7, 0.4 and 1.3% impulse from the three scenarios respectively.

Eurozone: 25% Tariff would cause a stagnation or mild recession

For the EZ, we estimate a 1.3% hit to GDP over the next two years if a 25% universal tariff is imposed. Exports to the US account for about 3% of GDP, and such a jump in tariffs is likely to reduce exports substantially. For instance, the European Commission has estimated that a universal 10% tariff on all US imports (Trump’s original proposal) might reduce exports by 1/3. All in all, we judge a 25% tariff as likely to put the eurozone into a mild recession, compared to our current base case of a slowdown in growth later this year. This would not be as severe in its impact as a universal tariff on all US imports, as described in our Global Outlook. This is because in a universal tariff scenario, global trade would see a massive shock that would have second round effects, and also, there would be less scope for a rerouting of existing trade which is otherwise likely to cushion the impact.

We also see this in the Canada/Mexico only scenario, where the EZ gets a slight GDP boost. Even in the case where all three face the new tariffs, the EZ does slightly better compared to the scenario where it is the only major trading partner hit, as its relative competitive position is affected less.

The Netherlands: Amplified effect relative to eurozone

We anticipate that relative to the broader eurozone, the Dutch economy would be worse off by about 30% from a 25% US import tariff. Goods exports to the US account for about 4.8% of GDP. The impact is amplified by the fact that, compared to the EU average, the Dutch economy is more trade-oriented and is part of more international supply chains. Also, of Dutch exports to the US, roughly 80% is Dutch-made goods for which the value-added is significantly higher than re-exports.

We estimate that the growth impact could add up to -1.8pp over the next two years. As explained above, since the 25% tariffs would not be applied globally, the hit to growth will be smaller than we estimated in our Global Outlook. This is also visible in the case where Mexico and Canada are faced with 25% tariffs, the Dutch economy would benefit by 0.3pp as it becomes more attractive for US firms to reroute to the eurozone. Also, if Canada, Mexico, and the EU all face tariffs, the impact on the Dutch economy would be less severe (-1.6pp) due to a reduced blow to its relative competitive position.

We already think that Dutch growth needs to come from solid domestic demand given the uncertain external environment. Import tariffs to the extent discussed above would drive the growth forecast down significantly, potentially risking a stagnation in the Dutch economy. Still, some sectors could ultimately remain exempt from tariffs, given their importance for the US or simply because the US does not produce it. For instance, given the critical role of semiconductor manufacturing equipment, like those produced by ASML , to the US industry, we anticipate this sector could remain exempt from potential tariffs. This would reduce the effective tariff rate by roughly 2pp. In the previous tariff case, exceptions were made for the steel sector, such as Tata Steel being exempt from the tariffs due to its production of steel products not manufactured in the US. It is possible that similar exemptions could be granted again, which would mitigate part of the rise in the tariff rate.