US Tariffs Targeting Eurozone Imports May Slash Growth by 0.43%, UBS Warns

The US imposition of a 10% tariff on Eurozone imports could shrink growth by as much as 0.43%, UBS economists report. The decline depends on Europe’s response, with retaliation increasing inflationary pressures while non-retaliation may curb price hikes but weaken growth further.

Tariffs Pose Significant Risk to Eurozone Growth

Economists at UBS predict that a 10% tariff on all EU imports might have a major effect on GDP growth.

This analysis models the proposed tariffs as part of a larger framework on global trade tensions, drawing attention to the fact that the economic impact of these measures will be greatly affected by the reaction of Europe and other countries around the world, Investing.com reports.

While complete retaliation would reduce the direct GDP impact of a 10% US tax on the Eurozone by 0.28 percentage points (pp), the absence of retaliation would result in a decrease of 0.43 pp, according to UBS. A decline in exports has a greater effect on GDP than a decline in imports.

According to analysts, “The nominal value of a 10% tariff on the Eurozone is worth about EUR30bn, or 0.2% GDP.”

Economic Fallout of Export Declines

It is projected that tariffs imposed solely to Europe will have a negative effect on GDP ranging from 28 basis points in the case of complete retaliation to 43 basis points in the absence of retaliation. This loss would be driven solely by a bigger drop in exports relative to imports.

The impact of these levies on inflation will depend on what Europe does. UBS estimates that retaliatory tariffs might lead to a 13 bp increase in consumer price inflation and a 26 bp increase in the GDP deflator.

As a result of less currency depreciation and lower import price adjustments, the consequences of inflation are mitigated in the absence of retaliation.

Inflation and Retaliation: Key Considerations

"We estimate the inflation impact between -2bp and +26bp for the GDP deflator and between 1 to 13bp for CPI," the authors said.

"If Europe does not retaliate and thus its import prices do not go up, the inflation impact is largely a function of the currency depreciation and growth weakness; by contrast, retaliation lifts import prices and inflation," they stated.

Things alter when you add in the broader escalation of tariffs in the US, like a 60% duty on Chinese goods. The UBS report notes that the European inflationary effects could be mitigated if the RMB depreciates compared to the USD and the EUR.

Domestic Demand Expected to Withstand Tariff Pressures

"If RMB depreciates more than other currencies due to higher US tariffs, imports from China could cheapen, neutralizing the inflationary impact of Europe's own tariffs," the note says.

According to UBS, the effects on domestic demand will be small, with coefficients of retaliation ranging from -0.01 to -0.13 pp.