Economists are anticipating that US President Donald Trump’s threat of a 30% tariff on EU goods, set to take effect August 1st, may not represent the final stage of negotiations.
Jens Südekum, personal economic advisor to German Finance Minister Lars Klingbeil, noted Trump’s history of aggressive pronouncements followed by retreats. Südekum expressed skepticism that this instance will deviate from that pattern.
Moritz Schularick, President of the Kiel Institute for World Economics (IfW), echoed this sentiment, stating a high probability of what investors have termed “TACO” – a shortening for “Trump always chickens out”. This references the tendency for the US President to refrain from fully implementing proposed tariffs, a precedent seen after “Liberation Day” in April when initially announced tariffs were reduced and suspended.
Should Trump maintain his position, the impact on the German economy would be significant. Schularick projects a reduction in gross domestic product growth by 0.5 to 0.6 percentage points next year. However, he doesn’t foresee this triggering a recession, citing projected economic growth currently estimated around 1.5% due to substantial government spending programs.
The economists advise the EU Commission, responsible for leading trade negotiations, to avoid hasty retaliatory actions. Instead, they recommend readiness to threaten counter-measures for August 1st, potentially incentivizing Trump to reconsider. They point out that Trump’s justification based on the US trade deficit with the EU is incomplete, noting a similarly substantial US surplus in the service sector. Schularick emphasized the need for the Commission to bring the service trade relationship into the negotiations. Südekum suggested that the EU should have counter-measures prepared, potentially including digital taxes, tariffs, or export restrictions, by August 1st.
Both anticipate potential market losses on Monday, a factor that could influence Trump’s decision-making. The United States, they argue, would ultimately be the largest economic loser in the conflict, given plans to impose high tariffs on other major trading partners like China and Japan, coupled with the inability to fully substitute imports with domestically produced goods, potentially leading to increased inflation. A residual risk of broader ramifications for Germany remains, particularly concerning the possibility of a US recession or instability within financial markets, which could lead to unpredictable consequences.