On November 6th, former President Donald Trump secured a decisive victory over Vice President Kamala Harris in the 2024 presidential election, defying pollsters’ predictions of a tight and drawn-out contest. After almost a decade at the top of US politics, President-Elect Trump’s familiar blend of protectionism, “America-First” trade policy, and a hawkish stance towards China has returned to the fore, embodied through his proposed comprehensive tariff hike.
The proposed measures include a blanket 10-to-20% tariff on all imported goods and a 60% tariff on all Chinese goods. The 100% tariff on Chinese-manufactured electric vehicles (EVs), implemented by the Biden administration in September, would remain in place. Moreover, the universal tariffs will rise to mirror any existing tariffs imposed by other countries on the U.S.
A report by the London School of Economics (LSE) Grantham Research Institute, led by Dr Aurélien Saussay, quantified the potential GDP impact on the US, China, the UK, and the EU. The US and China would see a 0.64% and 0.68% GDP contraction, respectively, a significant concern for the global economy. The UK and the EU would fare better with a contraction of around 0.1%. The seemingly minor impact on the EU GDP forecasted obscures the wide variance between EU member states.
By sector, European industries in direct competition with Chinese industries may profit from these measures. Still, ramifications on sectors reliant on Chinese materials and products for their operation would be exacerbated due to their deep entanglement with Chinese trade. Germany, heavily dependent upon exports to the US and with a dominant automotive industry dependent on Chinese suppliers, would face much steeper losses than France or Italy, which both have weaker trade relations with the US.
The report also examines the potential for retaliatory action from trade partners, which are allowed under the World Trade Organisation’s rules for proportionate action. Should trade partners reciprocate the imposed tariffs, potential GDP contractions would deepen for all parties, potentially leading to an escalation in trade disputes, compounding economic ramifications. The report suggests that the EU should take a limited response by using targeted measures to protect particularly vulnerable sectors but avoid an overly punitive reaction.
Following similar trade policies of the Trump administration’s first term, many economists agree that US consumers bore the brunt of the tariff measures. They are widely considered to have had a negligible impact on EU markets. However, any tariff hikes do have the potential to bolster latent inflationary pressures in Europe. Whilst US inflation has largely returned to targeted levels, domestic lower- and middle-income consumers remain vulnerable to import price rises.
High costs are inevitable for many US based companies with operations in China as they import their products back into the US market. Options such as passing on or cutting expenses, completing production in the US, or decoupling their production from China altogether all seem plausible. Higher reliance on machinery and electronics components is also anticipated with knock-on effects in other industries.
Additionally, the rise in costs of Chinese-produced components, critical for new renewable technology, could slow the development of clean energy schemes in the US and broader climate targets. Further concerns have been raised that maintaining the Biden administration’s 100% tariff could dampen EV adoption in Western markets, given China’s rising dominance in producing more affordable alternatives to middle-market Western brands.
Trump’s proposed tariffs hint at broader economic policy changes towards protectionism worldwide, with consequences for both the US and its trading partners. As they navigate these changes, policymakers must perform a careful balancing act. The economic outcomes of these tariffs will likely reshape trade relations across the globe in the coming years.
The full report can be found here: https://www.lse.ac.uk/granthaminstitute/publication/the-economic-impacts-of-trumps-tariff-proposals-on-europe/
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