Tariffs and Trade Wars
The new US administration has imposed additional tariffs on steel and aluminum imports of +25% against all imports from all partner countries. The economic effects are very heterogeneous --- minor in Germany, the EU, and the rest of the world, whereas significant in Canada and Mexico, for which the US is by far the most important trading partner, in general and specifically for steel and aluminum.
With the US threatening tariffs against EU member states, the question of how to respond becomes more urgent. Three counterfactual scenarios help understanding the mechanisms at play:
- Baseline: U.S. imposes +25% tariffs on Mexico and Canada, 10% on all others.
- Retaliation by the EU and China with 10% tariffs on U.S. imports.
- Further U.S. escalation with an additional 25% tariff on EU car imports.
In response to the denying two US military carrying return migrants landing at Colombian airports, US President Trump imposed 25% tariffs against all imports from Colombia (in addition to other measures against Colombian officials). Everything was called off within hours, the short-run (1 year) impact would have been substantial.
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The Trump administration threatened an additional 25% tariffs on all goods imported from Mexico and Canada, which would significantly harm all three economies. Real US GDP would decline by 0.2%, while Mexico and Canada would face dramatic short-run contractions of -4.2% and -2.8%, respectively.
A threatened 100% tariff imposed by the US on BRICS countries (Brazil, Russia, India, China, South Africa, and new entrants) would lead to severe economic losses for all countries involved.
In the run-up to the 2024 US election the future directions of US trade policy remained unclear. The later successful candidate Trump threatened wide-ranging tariffs — such as a 10% surcharge on all imports and a 60% tariff on those originating from Chinese — which could reduce global trade by 2.5% initially, with greater contractions if trade partners retaliate.
After a thorough review of China’s subsidy practices, the European Commission has decided to impose countervailing duties averaging 21 percent on Chinese electric vehicles, in addition to the existing 10 percent tariff. Specific tariff rates for individual manufacturers highlight the targeted nature of this review, aimed at addressing distortive subsidies.
The introduction of these duties will have significant effects. Recent calculations using the Kiel Institute KITE model indicate that the EU’s total tariffs, amounting to approximately 31 percent on Chinese electric vehicles, could lead to a reduction in imports of electric vehicles from China by around 25 percent. This corresponds to a value of about 4 billion US dollars.
