Updated March 4th, 2024 at 14:38 IST

Germany’s economy could contract by 1.2% by 2028 if Trump enacts import tariffs

According to the study, the impact on the US economy would be tangible, with a temporary reduction of 1-1.4 per cent in economic output in the initial years.

Reported by: Business Desk
Germany to return back to pre-pandemic level car sales | Image:Unsplash
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Trump’s import tariffs: The German Economic Institute (IW) has raised concerns about the potential economic impact on Germany if former US President Donald Trump were to return to office and enact the import tariffs he has proposed. The paper, released on the eve of "Super Tuesday," suggests that Germany's economy could contract by at least 1.2 per cent by 2028 under such circumstances. 

The proposed tariffs, including a 10 per cent levy on all imports and a substantial 40 percentage point increase on Chinese imports to 60 per cent, could have widespread consequences. The IW, a research institute funded by influential German business associations, stresses on the significance of this analysis against the backdrop of the US presidential primary cycle.

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According to the study, the impact on the US economy would be tangible, with a temporary reduction of 1-1.4 per cent in economic output in the initial years. This contraction is attributed to higher consumer prices, increased unemployment affecting consumption, and a confidence shock influencing short-term investment. However, the study suggests that the US GDP is expected to rebound to a slightly negative position by 2028, thanks to improvements in trade and fiscal balances.

In contrast, the consequences for Europe, particularly export-oriented nations like Germany, are projected to be more severe. The study forecasts a 1.2 per cent drop in German GDP by 2028 due to diminished exports and a subsequent decline in private investment. If China were to respond with its own 40 percentage point increase in import duties, the impact on Germany's GDP could escalate to 1.4 per cent.
 

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The IW recommends proactive measures for the European Union (EU) to mitigate potential risks. This includes strengthening trade relations with the U.S. during President Biden's term by institutionalizing the EU-US Trade and Technology Council. Additionally, the IW advises signing agreements on critical minerals, green steel, and aluminum trade, along with pursuing additional free trade agreements with partners such as Australia, Mercosur, Indonesia, or India.

Furthermore, the IW suggests that the EU should be prepared to counter any threats of new trade barriers by Trump. This involves having credible retaliation measures in place to safeguard EU interests in the event of such developments. The study urges strategic planning and assertive actions to navigate potential challenges to Europe's economic landscape.

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(With Reuter’s inputs)

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Published March 4th, 2024 at 14:38 IST