Investing.com — President-elect Donald Trump has already signaled that trade tariffs are likely to be part of his policy agenda, but despite concerns that the US-EU trade dispute could threaten a new wave of inflation, Citi says the tariffs would could prove deflationary in the eurozone at a time when the economy is in decline.
“Even if the EU reciprocates with equal pricing with reciprocal tariffs, the effect of HIPC is likely to be negligible,” Citi economists said in a recent note.
US imports account for just over 10% of euro area goods imports, a quarter of which is energy, but it is unlikely to be taxed, economists said. Since consumer goods account for only about 6% of total US goods imported into the eurozone, the import price pass-through to the HICP “is typically low,” they added.
The potential for a total US tariff of 10% on EU goods and additional measures against China, the EU’s biggest source of imports, is likely to further weigh on eurozone economic growth at a time when the single economy is already facing the difficult task of reviving growth, they said. economists after reducing the eurozone GDP growth by 0.3%.
“This shock to the already faltering European manufacturing sector could affect employment and wages in the tradable sector and beyond,” the economists added.
Meanwhile, on the export front, tariffs are likely to hurt US and Chinese demand for eurozone exports, Citi said, although it added that they had previously benefited from trade diversion as US reliance on China collapsed.
A quick look at the impact of tariffs from the previous Trump administration offers clues about the road ahead for the eurozone. The most significant consequence of Trump’s previous trade disputes for Europe was likely to be an increase in the penetration of Chinese imports, which had “probably substantial disinflationary implications”, economists said.
