Trump Tariffs Could Reduce GDP in Germany by 0.3 Percent
The tariffs announced by the US President would massively damage the German economy. According to initial calculations by the ifo Institute, the new tariffs would reduce GDP this year by 0.3 percent. Some key industries such as automotive and mechanical engineering would be particularly hard hit. “As Germany’s economy is already stagnating, it is possible that the US tariffs will push economic growth in Germany below zero,” says ifo President Clemens Fuest.
“If the US sticks to the announced tariffs, it will be the biggest attack on free trade since the Second World War,” says Fuest. According to the ifo experts, the German economy is suffering in three ways: firstly, because Germany can export less to the US. Secondly, because Germany can export less to China due to China’s lower competitiveness. Thirdly, because countries like China will then have to switch more to other export markets, hence putting German companies under additional pressure.
“The average tariff difference between the US and the EU is just 0.5 percentage points. The fact that additional tariffs of 20 percent have nevertheless been imposed on the EU shows that the US government has arbitrarily set the level of reciprocal tariffs and also included non-trade aspects such as VAT rates,” says ifo foreign trade expert Lisandra Flach. “Since such an interpretation of reciprocity is shared by only a few trading partners worldwide, this makes bilateral negotiations with the US government difficult,” says Flach.
The European Union should act with the greatest possible unity in its response to the new US tariffs and threaten concrete countermeasures, such as a digital tax, which would hit the US hard. “However, a hasty response with counter-tariffs would be counterproductive and could further promote a trade policy escalation spiral,” warns ifo expert Andreas Baur. Negotiations should be held first, but with a relatively short deadline before the countermeasures come into force.
According to ifo President Clemens Fuest, the US President’s strategy is implausible: “The competitiveness of an economy is measured by its productivity, not by its foreign trade balance. Productivity will decline because the tariffs will have a negative impact on the international division of labor. If Trump wants to attract investment to the US, while at the same time reducing the trade deficit, Americans themselves will have to save more. That will require painful adjustments in the form of cutting back on consumption.”
The idea of completely replacing direct taxes with tariffs is also illusory in Fuest’s opinion. Nevertheless, Trump could use the revenues to reduce direct taxes. However, this would have a deeply regressive effect. “If Trump also wants to lower the budget deficit, as he claims, tax cuts won’t happen.”
