By Christian Schulz, Chief Economist, Allianz Global Investors
The specter of a renewed trade war has returned to global markets as former President Donald Trump ramps up threats of import tariffs—most notably a 30% levy on goods from the European Union. This escalation places the world’s largest bilateral trading relationship under strain, raising concerns over economic and market impacts on both sides of the Atlantic.
While markets appear to assume these threats will ultimately be watered down or retracted, investors would be wise not to dismiss the risks too lightly.
The Stakes for Europe
The United States remains a crucial export destination for the European Union, accounting for around 20% of EU exports in 2024. A full 30% tariff on EU imports—if implemented—could severely disrupt this flow. Excluding sectors already hit by earlier tariffs (such as cars and steel), the targeted exports represent about 2.6% of EU GDP, with exposure varying significantly by country. Ireland tops the list with 9.8% of GDP reliant on US exports, followed by Germany (3.1%) and Italy (2.8%).
A straightforward estimate suggests that the EU could face a 1% GDP loss over a couple of years purely from reduced export volumes. More complex models that factor in second-order effects—such as trade diversion or currency shifts—point to an even greater economic impact.
In such a scenario, European firms are likely to absorb the initial blow through lower profit margins. Over time, the strain would extend to employees via weaker wage growth and, eventually, job cuts. These dynamics would be disinflationary for the EU.
To counteract the economic drag, the EU could pursue rate cuts and fiscal stimulus. Longer-term, the bloc might accelerate structural reforms and diversify trade relations to reduce reliance on the US.
Implications for the US
The effect of new tariffs on the US economy would play out differently. A 30% import levy would reduce the supply of goods in the domestic market, potentially raising consumer prices. If the full cost is passed on, inflation could increase by as much as 3%, particularly after current inventories are exhausted—likely in the autumn.
At the same time, such tariffs could generate substantial revenue. A 30% average duty on $3 trillion in annual imports could yield up to $900 billion, offering a fiscal boost that might ease concerns about US debt sustainability. However, this would come at the cost of higher inflation and potential damage to key trade relationships.
What It Means for Central Banks and Markets
The macroeconomic effects of tariffs will almost certainly influence monetary policy:
- In the US, the Federal Reserve may face internal debate over how to respond to rising inflation. Dovish members may argue it’s a temporary supply shock, while hawks could call for tighter policy to contain price growth.
- In the EU, the economic drag from reduced exports could prompt the European Central Bank to lower rates further. Simultaneously, expectations of fiscal support could drive up longer-term bond yields.
Even if tariffs are never enacted, the uncertainty surrounding them can already weigh on European growth and equity markets. This may reverse some of the recent outperformance of European equities relative to the US and remove support for the euro.
Investor Outlook: Don’t Be Complacent
This situation echoes the so-called “Liberation Day” tariffs announced by Trump earlier this year. At the time, markets sold off sharply before the US postponed implementation. Today, markets again appear to expect a pragmatic approach from the former president.
Still, the threat is real. Tariffs of this scale—whether implemented or not—are large enough to force a market correction. Investors should brace for potential volatility as negotiations unfold.
In this environment, flexibility and diversification are key. Rather than rely too heavily on any one region or asset class, investors may want to adopt a nimble, globally balanced strategy.
Bottom line: While a full-blown trade war may still be avoided, the path forward is uncertain. The risk of economic disruption is material—and markets may not be fully pricing it in.
