How will Trump's economic policies affect the EU economy?
Ethan Ilzetzki and Marta Grzana
Thursday, Feb 26, 2025
​​
Summary
The January 2025 CfM-CEPR survey asked the members of its panel on the impact of Trump’s tariff plans on the EU economy. A clear majority of the panel believes the effect of US tariffs on EU economic growth to be relatively small, reducing economic growth by less than 1 percentage point over the next four years. Most panellists believe that the EU’s best response to US tariffs would be a combination of retaliatory targeted tariffs, trade deals with non-US partners, and taxes or regulatory measures constraining US tech companies.
Background
The January 2025 CfM survey asked the members of its panel for their opinion on the potential impact of US tariffs on the EU economy. The panellists were asked to estimate how much would the tariffs affect EU economic growth over the next four years, and to suggest the EU’s best policy response to the tariff policy.
Trump’s Economic Policies
With the election of Donald J. Trump, there is heightened uncertainty in the global economy. President Trump ran on an economic platform that prioritized highly protectionist policies, including a proposed 60% tariff on China, which could affect global trade and macroeconomic conditions in both the United States and abroad. Even before the election, Trump’s platform received extensive criticism from economists for its potential to slow economic growth and drive inflation (Reid, 2024).
There are four main pillars of Trump’s economic platform: reduced taxation, balancing the deficit, deregulation, and tariffs. Trump is likely to extend his 2017 tax cuts and possibly reduce taxes further. The Congressional Budget Office estimates that these tax cuts could increase the Federal deficit by up to $4.5 trillion over the course of ten years (Levy, 2024). However, Trump will also look to balance the Federal deficit and may use measures such as tariff revenues and reductions in government spending to offset increases in the deficit caused by tax cuts. Trump’s tariff policies are likely to have the greatest impact on the global economy. Trump has proposed a baseline tariff minimum of 10% on all imports to the United States, with per-country rates, with 25% tariffs on imports from Canada and Mexico currently on hold, and 10% on imports from China already in effect. However, the details of the tariff measures are still unclear, and some rates may have been publicized as bargaining chips.
The Peterson Institute for International Economics estimates that about 48% of the United States’ imports are from countries not including China and US free trade agreement (FTA) partners. Such non-FTA partners include the EU, the UK, and Japan. Currently, imports from these countries are taxed at MFN rates, as set out by the WTO. A 10% tariff rate would substantially increase import taxes across most types of goods, except for hides and skins, footwear, and clothing, which are currently taxed above the 10% blanket rate that the President-elect has proposed. Machinery, chemicals, and electronics stand to be the most affected by a 10% blanket rate as each is currently taxed below 1%, and combined they make up two thirds of a trillion dollars in imports (Contreras et al., 2024). On the other hand, currently, the EU sets their tariffs at MFN rates with most rates in the single digits. In 2022, the average MFN rate for US non-agricultural exports was 3.9%; in 2023, 73% of US exports entered the EU at zero tariff (Eurostat, 2024). Therefore, a mirroring retaliatory response could significantly affect US exports to the EU. Nevertheless, it is possible that the tariffs will not sever substantial trade flows but rather redirect them through third countries into the United States (Setser, 2024).
Trump’s tariffs and the overall uncertainty around US trade policies could affect the EU economy in several ways. Overall, tariffs could significantly impact European exporters and lead to a retaliatory response from the European Commission. They could also have an impact on inflation and interest rate decisions in the upcoming months. The new US administration’s policies could result in slowed EU economic growth. Current forecasts indicate a small increase in economic growth in the upcoming two years after an already stagnating 2023 and growing only moderately (at 0.2%) in 2024. In the case of a 10% tariff imposed, and the resulting financial tightening, the IMF predicts that EU growth over the next two years would be 1% slower, relative to the current forecast (Bertoldi & Buti, 2025). The ECB has already downgraded 2025 net-export forecasts. The EU automotive sector, specifically, is expected to bear a significant impact given the large trade imbalance between the industries in the US and in the EU. The sector is anticipating an increase to 25% tariffs from the current 2.5% which would make the EU cars significantly less price-competitive in the American market (Hahn, 2025).
Bruegel specifies three main elements of a best EU’s policy response to the US administration’s tariff threats. Firstly, the EU should seek a bilateral agreement with the US, with the aim of avoiding the imposition or minimising the impact of the tariffs. Such negotiation could mean an offer to consider facilitation of bilateral trade and economic security measures, backed by a credible threat of retaliatory tariffs or a negative list. Secondly, the EU should continue to promote WTO reform, while maintaining a functioning rules-based trading system. The EU could build a coalition of countries to counter the drift towards protectionism that would include key trade partners from both the Global North and South. Finally, the EU should reinforce and expand its network of preferential trade agreements, particularly it should aim to improve trade relations with the UK and strengthen trade partnerships with countries in Africa and the Indo-Pacific region (Bercero, 2024). Apart from an external response, the EU should make its economy more resilient and aim for its economic growth model to depend less on net exports and more on domestic demand (Bertoldi & Buti, 2025).
Question 1: How would a 10% US Tariff on all EU imports affect EU economic growth per year, over a four-year period?
Thirty-two panel members responded to this question. The clear majority (slightly under 70%, over 70% when weighted by confidence) believes that a 10% US tariff on all EU imports would be relatively benign, reducing EU economic growth by less than 1% per year over a four-year period. A quarter of the panel believes that the effect would be larger, reducing EU economic growth by between 1 and 2 percentage points.
Most panel members estimate the impact on the EU to be small and temporary. Jürgen von Hagen (University of Bonn) says that: “We should expect an initial decline in the level of exports to the US, but not a lasting impact on the rate of growth. Thus, a moderate decline in the level and then a slight decline in the rate of growth from there at most.” Patrick Minford (Cardiff Business School) echoes that thought and adds that “according to our World Trade model, the main distortionary impact is on the US,” and estimates that “the macro effect of reduced US demand on EU exports could be of the order of 1.25 [percent]”.
The majority of the panel points out that EU reliance on exports to the US is relatively small. Robert Kollmann (Université Libre de Bruxelles & CEPR) also believes that “The GDP effect is likely to be limited, as EU merchandise exports to the U.S. represent only 2%–3% of EU GDP”. He adds that: “Simulations using medium-scale macroeconomic models suggest that the EU GDP effect would likely remain below 1% over a four-year period (e.g., Lindé and Pescatori, 2019; Celebi and Roeger, 2025).” Angus Armstrong (UCL) explains that “tariffs are a price level effect, on their own they should have minimal consequences for economic growth”.
Michael Wickens (Cardiff Business School & University of York) believes that the damage of tariffs would be small relative to the underlying slow growth performance of the region. He states that “there would be a negative effect on the EU, especially on automobiles and hence Germany”; however, “as the growth rate of the EU is already below 2%, tariffs of 10% are very unlikely to reduce growth to zero or below”. Moreover, he believes that “a far bigger issue for the US, the EU and the UK is the extensive breach of fair trading by China”.
Some believe that the reduction in growth may turn out to be less than forecasted. Eran Yashiv (Tel Aviv University) recalls that: “We have seen in the Russian gas episode that the downturn was less than the one feared. Moreover EU economies are ready to take action on this latter. So the 1p.p deceleration forecast by the IMF over two years may well turn out to be less than 1 p.p. over four years.” He adds that “there are no highly reliable estimates and uncertainty is high and so I have little confidence in this (or any other) estimate”.
Tomasso Monacelli (IGIER, Università Bocconi) also believes that the effect would be small and explains that: “At an unchanged exchange rate, the Eurozone faces the full impact of the reduction in export demand.” He estimates an impact “totalling 45 billion. This represents approximately 0.3% of Eurozone GDP.” However, he believes there could be some amplifying effects: “First, a decline in investment: as exports drop, sectors reliant on external demand reduce capital expenditures, propagating the contraction. In addition, employment and consumption effects: a fall in export-dependent jobs leads to weaker domestic demand, further amplifying the output loss.”
On the other hand, some members of the panel believe the tariffs to have a larger negative impact on EU economic growth. Jorge Braga de Macedo (Nova School of Business and Economics, Lisbon) claims that: “Given the slow growth of the EU economy over the next two years predicted by the IMF, a 10% tariff would have a strong impact on free transatlantic trade hurting mostly Germany and Italy.”
Some panellists are more uncertain about the impact but believe that it could be significant. Roger Farmer (University of Warwick) suggests that “growth is strangled by regulation and a large public sector.” Evi Pappa (Universidad Carlos III de Madrid) believes that the effects on growth depend a lot “on the EU reaction to the tariffs, the reaction of monetary policies in the two continents, as well as other factors related to financial conditions and debt pressures”.
​
Question 2: What is the best response by the EU to US tariffs, to minimize damage to the European economy, combining economic, bargaining, and geopolitical considerations?
Thirty-two panel members responded to this question. The survey allowed panellists to choose more than one option and the percentages reflect the share of the panel that choose each option. Most of the panellists agreed that the EU's best response to US tariffs should be a combination trade measures including retaliatory targeted tariffs (over 40% of the panel) and trade deals with non-US partners (almost 40%). Around 35% of the panellists believed that the EU’s best response should involve implementing such domestic policy tools as taxes or regulatory measures constraining US tech companies.
Most panellists agree that diplomacy is preferred to retaliatory measures. Patrick Minford (Cardiff Business School) argues that it is best “to use bargaining over possible responses to reach a settlement to avoid trade war”. Angus Armstrong (UCL) echoes that thought and claims that: “The EU should not respond to tariffs by raising its own tariffs (Joan Robinson described as tipping boulders into your own ports).” Likewise, Jürgen von Hagen (University of Bonn) suggests that: “the Trump administration uses tariff policy to achieve non-trade goals - border security, immigration, and drugs in the case of Mexico, inflows of fentanyl in the case of Canada. The EU should think about and prepare itself for making such deals keeping tariffs as they are in exchange for concessions in other areas.”
Nevertheless, some panellists view retaliatory tariffs as a best response in a scenario where negotiations fail. Rober Kollmann (Université Libre de Bruxelles & CEPR) suggests that:” The EU should negotiate with President Trump to address legitimate concerns, such as insufficient European defence spending. If talks fail, the EU should impose targeted retaliatory tariffs on Trump's domestic political allies.” Some recognise the harmful nature of retaliatory tariffs, yet still believe they are a best response in the given situation. Michael Wickens (Cardiff Business School & University of York) explains that: “Any increase in tariffs on the US by the EU would harm the EU. Therefore their purpose would need to be retaliatory in order to cause the US to remove its tariffs on the EU. Tariffs on tech, although harmful to the EU, would give a clear retaliatory signal to the heart of the Trump administration.”
Another part of the panel drew focus to the significance of trade deals with non-US partners. Nicola Fuchs-Schündeln (Goethe University Frankfurt) thinks that: “it would be especially important to strengthen ties with certain non-US partners, and to act with a united European voice”. Jorge Braga de Macedo (Nova School of Business and Economics, Lisbon) highlights that: “combining economic, bargaining, and geopolitical considerations is key in this case in order to avoid an escalation”. He focuses on the importance of “deals with non-US partners including the global south (South America in particular because the Mercosur agreement has been decades in the making)”. He also adds that: “Another complementary reform would involve the euro and a stronger monetary integration with the African Union, which could have relevant trade effects.”
References
Bercero, I. G. (2024, December 9). How the European Union should respond to Trump's tariffs. Bruegel. https://www.bruegel.org/policy-brief/how-european-union-should-respond-trumps-tariffs
​
Bertoldi, M., & Buti, M. (2025, January 13). America under Trump: Domestic and European implications. CEPR. https://cepr.org/voxeu/columns/america-under-trump-domestic-and-european-implications
​
Celebi, K., & Roeger, W. (2025). The impact of trade and FDI on EU convergence: evidence from an FDI-DSGE approach (forthcoming).
​
Contreras, J., Lovely, M. E., & Yan, J. (2024, December 12). No trade tax is free: Trump's promised tariffs will hit large flows of electronics, machinery, autos, and chemicals. Peterson Institute for International Economics. https://www.piie.com/blogs/realtime-economics/2024/no-trade-tax-free-trumps-promised-tariffs-will-hit-large-flows
​
Hahn, C. (2025, January 22). Driving into uncertainty: How Trump's tariffs could derail Europe's automotive powerhouse. Oxford Economics. https://www.oxfordeconomics.com/resource/driving-into-uncertainty-how-trumps-tariffs-could-derail-europes-automotive-powerhouse/
​
Eurostat. (2024, June). International trade in goods - tariffs - Statistics Explained. European Commission. https://ec.europa.eu/eurostat/statistics-explained/index.php?title=International_trade_in_goods__tariffs#The_EU.E2.80.99s_common_trade_policy_and_tariffs
​
Levy, M. D. (2024, December 19). An Evenhanded Analysis of Trump's Economic Policies. Hoover Institution. https://www.hoover.org/research/evenhanded-analysis-trumps-economic-policies
​
Lindé, J., & Pescatori, A. (2019, April 4). The macroeconomic effects of trade tariffs: Revisiting the Lerner symmetry result. Journal of International Money and Finance, 95, 52-69.
​
Reid, T. (2024, June 26). 16 Nobel Prize-winning economists say Trump policies will fuel inflation. Reuters. https://www.reuters.com/world/us/16-nobel-prize-winning-economists-say-trump-policies-will-fuel-inflation-2024-06-25/
​
Setser, B. (2024, June 4). The Dangerous Myth of Deglobalization. Foreign Affairs. https://www.foreignaffairs.com/china/globalization-dangerous-myth-economy-brad-setser