How could Europe's largest economy lose under Trump's plans?
The German economy, although still the largest in Europe, could be disrupted by the policy agenda of US President-elect Donald Trump, who has promised high trade tariffs that could cost 1% of Germany's GDP. Throughout his campaign, Donald Trump has talked about total tariffs of 10-20% on imports, including those from Europe.
Although a trade tariff, a tax imposed on foreign goods when they enter a country, would be paid by Americans, it would ultimately contract the market for foreign products, according to experts. Just before self-proclaimed tariff man Donald Trump reawakened, German exports of goods to the US hit their highest levels in decades, according to Germany's Federal Statistics Office.
Germany had a trade surplus of €63.3 billion with the US in 2023, when nearly a tenth of German exports went to the US, worth €157.9 billion. The potential damage that Trump's tariffs would bring to the German economy is suspected to be equal to 1% of GDP.
"If the tariff plans are implemented, it could cost us one percent of economic output in Germany," Bundesbank President Joachim Nagel told German newspaper Die Zeit, adding that "this is painful, especially since the German economy is not growing not at all. year and will probably only increase by less than one percent next year, if the new tariffs are actually imposed, we may even slip into negative territory."
For context, 1% of German GDP translated into 42 billion euros in 2023. However, during the 4 years of Trump's Presidency, Germany could experience a loss in GDP of over 127 billion-180 billion euros, according to a report by German Economic Institute (counting a 10%-20% tariff on US imports from Europe).
Even without any negative outlook, the German economy is already struggling, with global demand squeezing the country's export-oriented output, the German manufacturing sector in crisis - and the resulting impact of the energy crisis caused by the war in Ukraine. In addition, the country must face the fall of its government and early elections scheduled for February 2025.
There are expectations, even from the federal government, that the German economy will shrink slightly this year. US investment bank Goldman Sachs also expects German GDP to contract by 0.1% this year and grow by 0.5% and 1% in 2025 and 2026 respectively.
Which sectors are most threatened?
According to the ifo Institute, a potential tariff of 20% on imported goods could lead to German exports to the US falling by around 15%. The auto sector is likely to be in the firing line for Trump (Germany exports a lot of luxury cars to the US market), but we expect steel and aluminum, chemicals and pharmaceuticals to also be exposed to these trade tariffs
In the unlikely scenario of the United States retaining tariffs on Chinese electric vehicles but not on German ones, the US could provide a booming market for the European auto sector, one where it does not have to compete with Chinese models. But Trump is likely to favor US-made carmakers.
According to Goldman Sachs, the new Trump era "is likely to bring new defense spending and security pressures for Europe", but they expect a limited boost to growth in the sector. In Germany in particular, fiscal restraints could "prevent sharp growth now", Mansfield added.
Overall, exporters may have some good news ahead of the tariffs. In the short term, US importers may front-load their orders in order to beat the tariffs. "Strong US growth and a strong dollar will also support US demand for German goods," she said.
An impending trade war
Economists fear a trade war between the US and the EU, the latter of which exported 502 billion euros worth of goods to the US in 2023, accounting for a fifth of all non-EU exports. However, there is no expectation that the next US president will rush to impose all tariffs at once, especially with some pushback from the US private sector, potential legal challenges and negotiations to agree to divestment with partners important traders (including the EU) may delay the process.
The Regional Director for Europe at Economist Intelligence thinks that "the EU will use a mixture of carrots and sticks to try to reach a deal with Trump". Brussels-based think tank Bruegel wrote in their analysis that such a deal could include US purchases of natural gas, agricultural products and weapons from the EU as part of a deal.
Meanwhile, increased trade uncertainty could cause more damage than current tariffs. "Most of the drag on growth would come from higher trade policy uncertainty (TPU), rather than actual rate hikes consistent with the 2018-19 experience," Goldman Sachs' latest report read: The economic implications of Trump's re-election for Europe. The current political turmoil is also limiting the effectiveness of the German government in responding to the various pressures on firms at this time.
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