Impact of Proposed Trade Tariffs on Eurozone

Investing.com — President-elect Donald Trump has indicated that trade tariffs will likely be part of his political agenda. However, amidst concerns that a U.S.-EU trade conflict could trigger inflation, Citi suggests that tariffs might actually be deflationary in the Eurozone, which is currently facing economic challenges.

Citi economists noted that even if the EU enacts reciprocal tariffs, the impact on the HICP (Harmonized Index of Consumer Prices) is expected to be minimal. Imports from the U.S. make up slightly over 10% of Eurozone goods imports, with a quarter of that being energy, which is unlikely to be affected by these tariffs. Moreover, consumption goods constitute only about 6% of total U.S. goods imported into the Eurozone, leading to a low passthrough impact on prices.

The anticipated blanket 10% tariff on EU goods, in addition to potential measures against China (the largest source of EU imports), could further impede Eurozone growth, especially when the economy is struggling to recover. As a result, Citi has downgraded its projections for Eurozone GDP growth by 0.3%.

This economic shock could negatively affect employment and wages within the European manufacturing sector and beyond. Furthermore, U.S. and Chinese demand for Eurozone exports may suffer due to tariffs. However, there is a possibility that Eurozone exports previously benefited from trade diversion, especially as U.S. reliance on China has diminished.

A review of the impacts of tariffs from the Trump administration highlights potential outcomes for the Eurozone. One notable consequence has been an increase in Chinese import penetration, which has likely led to significant disinflationary effects for Europe, according to Citi economists.