Trump's tariff threat: Germany could face an economic setback if former US President Donald Trump implements his proposed tariff increases, a recent study from the German Economic Institute (IW) suggests. The study, published just before "Super Tuesday" in the US presidential primary cycle, indicates that Trump's plans, including a 10 per cent tariff on all imports and a substantial hike on Chinese imports, could lead to a contraction of at least 1.2 per cent in Germany's GDP by 2028.

According to the IW study, while the initial impact on the US economy might be negative with a temporary reduction of 1-1.4 per cent in GDP due to higher consumer prices and unemployment, the US GDP could recover to a slightly negative level by 2028. However, for Europe, especially export-driven economies like Germany, the consequences would be much harsher.

GDP decline projections

Germany's GDP is projected to decline due to reduced exports and a subsequent decrease in private investment. The study suggests that if China retaliates with its own tariff hikes, the impact could be even more severe, potentially dropping German GDP by as much as 1.4 per cent.

In light of these findings, the IW stressed the need for the EU to prepare for such a scenario. Suggestions include strengthening trade relations with the US under President Biden's term by institutionalising the EU-US Trade and Technology Council and signing agreements on critical minerals, green steel, and aluminium trade. Additionally, the EU is advised to pursue more free trade agreements with partners such as Australia, Mercosur, Indonesia, and India.

Furthermore, the IW recommends that the EU be ready to respond if Trump were to implement new trade barriers against the EU. This could involve threatening credible retaliation to counter any potential threats from the US administration.

(Write Reuters Inputs)