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By Robert Stehrer

Donald Trump’s decisive election victory suggests that he is likely to continue the policies from his first term in office (2017 to 2021) and potentially adopt an even more assertive approach. His trade policy back then was characterised by unilateral measures, aggressive negotiating tactics, and a focus on reducing the trade deficit and protecting US industry. Multilateral cooperation and environmental issues are again likely to play a subordinate role. His stated ‘Make America Great Again’ economic policy (‘Maganomics’) also promises lower taxes, fewer regulations, lower interest rates and lower inflation.[1]

The Republican majority win in the US Senate on 5 November – and presumably also in the House of Representatives – similarly promises a more aggressive stance on economic policy in Trump’s second term. The result means that he will have a largely free hand in Congress for at least the first two years of his presidency – until the 2026 midterms – and will be able to pursue an aggressive strategy to enforce ‘his’ trade rules, in all likelihood implemented through unilateral tariffs, subsidies and trade restrictions. These measures are aimed at counteracting what Trump sees as unfair trade practices and at strengthening the US’s position in global trade. The stated aims are to promote and relocate domestic production and to reduce international dependence, particularly on imports from China. Trump is aiming to cut imports and bring the production of important industries back to the US in order to secure independence from global supply chains – goals that are also shared by his rival, Kamala Harris.

Possible effects of the planned tariff increases

A central – if not the most important – instrument of Trump’s trade policy during his first term was the introduction of (or an increase in) tariffs to apply pressure in negotiations. Baldwin (2024) points out that this was one of the few tangible measures that Trump promised in his initial election campaign and consistently implemented from 2017 to 2021. Notably, during his 2024 presidential campaign he also announced plans to impose a general 10% tariff on all imports, with additional tariffs of up to 60% (or more) specifically targeting imports from China.

This poses a significant threat. To assess the impact of such tariff increases, it is important to understand the current tariff levels. The EU currently imposes average tariffs of 5.2% on imports from both the US and China. By contrast, the US applies average tariffs of 3.5% on imports from the EU and 3.6% on imports from China. China, meanwhile, enforces higher average tariffs of 7.5% on EU goods and 7.6% on US goods. The proposed increase in US import tariffs to 10% under Trump would, therefore, nearly triple the current rate.

What impact would such increases have? In common with other studies, Clausing and Lovely (2024) argue that the tariffs proposed by Donald Trump would burden US consumers through higher prices and the associated loss of prosperity. They estimate that if the increased costs associated with a 10% tariff were to be passed on in full, those costs would amount to around 1% of economic output. If the additional tariff on Chinese imports were to be increased to 60%, the total costs would amount to 1.8% of economic output.

Although Clausing and Lovely (2024) point to possible additional revenue from the tariff increases, this is nowhere near enough to offset the likely to be growing budget deficit caused by the Tax Cuts and Jobs Act passed during Trump’s first term in office. They also emphasise – with reference to further literature – the regressive nature of import tariffs, i.e. the fact that they place a much greater burden on people with a low or a middle income. Together with the tax cuts for high and top earners also planned by Trump, they could further exacerbate social inequality in the US.

The two economists also emphasise that the tariffs already introduced have hardly helped workers, who have suffered a so-called ‘China shock’ – i.e. the relocation of industrial production to China (see also Autor et al., 2024). This illustrates that while protectionist measures do generate revenue, they are unlikely to provide the intended economic protection for US workers.

Baldwin (2024) similarly points out that import tariffs could substantially undermine the competitiveness of US companies. A significant proportion of imports consists of intermediate goods, which are processed in the US. As a result, tariff increases would raise the price of these goods. Even if Donald Trump were to exclude tariffs on final products, in order to mitigate the regressive effects on lower-income groups, the measures could still have adverse consequences: the higher price of intermediate goods would increase production costs for companies and ultimately place them at a competitive disadvantage.

The impact of such tariff increases can also be estimated using trade models. Our own initial estimates, which use a general equilibrium model (see Floréz Mendoza et al., 2024),[2] show that if US import tariffs were to rise to at least 10% – with higher tariffs remaining at the original level – total income in the US, including tariff revenue, would rise by 0.08%. However, real income, which excludes this tariff revenue, would at the same time fall by 0.14%.

According to these calculations, income in China would fall by 0.02%, while the EU countries would be hit even harder, with a fall of 0.055%. If tariffs on imports from China were increased further to 60%, US income (including customs revenue) would rise by 0.12%, but real income would fall even more sharply, by 0.33%. In China, the loss of income would be slightly higher at 0.15%. For the EU, at -0.05% the fall in income would be marginally less pronounced than in the previous scenario. The global trade volume would decline slightly as a result. It is important to emphasise that these calculations do not take account of other effects, such as retaliatory measures by other countries against the US, which could also respond with tariff increases, or resulting growth losses caused by uncertainty and other macroeconomic factors. These could significantly influence the overall impact, as macroeconomic model simulations show.[3]

Trade wars loom with China and the EU

Even if the direct effects of the tariff increases planned by Trump are not dramatic in themselves, there is a great danger that they could either fuel trade wars (US vs. China) or trigger them (US vs. EU) and escalate them. The resulting loss of prosperity could be considerable, depending on the extent to which the reciprocal punitive measures escalate. In any case, Donald Trump’s election victory is likely to make the international trading system even more unstable than it already is (Baldwin, 2024).

Another key item on Trump’s agenda will be the possible renegotiation of – or potentially even withdrawal from – existing trade agreements, with the aim of ensuring better protection for US industry and creating better conditions for American workers. One of the most significant achievements of his first term in office was the United States-Mexico-Canada Agreement (USMCA), which is considered the successor to the North American Free Trade Agreement (NAFTA). However, the USMCA contains a clause stipulating a review in July 2026, which raises some uncertainty about the continuation of the agreement.[4]

It is likely that Trump will also call for measures to protect intellectual property, particularly vis-à-vis China, in order to safeguard American technology and innovations. He could again use tariffs and sanctions as a means of exerting pressure.

With regard to climate policy, it is to be expected that Trump will attach little importance to this issue. Environmental standards are unlikely to play a role in future trade agreements under his presidency. He could even initiate another withdrawal from the Paris climate protection agreement and promote investment in various fossil fuels, in order to further strengthen US independence.

Europe needs innovation and competitiveness

In geopolitical conflicts that affect international trade, Trump is likely to take a strongly unilateralist stance, advocating aggressive negotiating tactics and sanctions and using trade policy to tackle geopolitical problems as he sees fit and to assert US interests. His unpredictable policy towards Russia and Ukraine will be a particular challenge for Europe. Although the specifics of Trump’s economic and trade policy will probably reflect the notoriously mercurial nature of the new US president, its broad outlines can already be discerned.

Either way, Europe will have to stand on its own two feet in many areas, as Trump is likely to perceive the old continent primarily as a competitor, rather than a partner. The EU would therefore be well advised to put its own competitiveness – especially that of industry – on a new, innovative footing, and finally pull together in terms of economic policy. The crisis-ridden German automotive industry offers a cautionary example of what could happen otherwise. As a matter of fact – even without Donald Trump and any higher tariffs on imports into the US – the sector is already fighting to arrest its decline in the face of competition from China.

However, in order to get back on its feet economically, the EU will have to invest a lot of money in innovation and industrial policy, as former European Central Bank President and former Italian Prime Minister Mario Draghi recently explained in his report for the European Commission (Draghi, 2024). Perhaps Donald Trump’s election is precisely the wake-up call needed to finally convince leaders to tackle these major projects in Europe and negotiate with Washington on an equal footing again.

Unfortunately, Trump’s election puts global cooperation as a whole at risk and could lead to a further weakening of multilateral institutions, such as the World Trade Organization (WTO) or the UN. There is therefore an urgent need to think about a ‘multilateralism 2.0’ that takes account of the current geopolitical and geo-economic realities. Based on Trump’s credo, the approach should therefore be ‘Make multilateralism great again’. However, the chances of such an approach actually being adopted are extremely slim, which means that global problems are likely to worsen. This is especially troubling for the EU.

I thank Andreas Knapp for his valuable suggestions and comments and Oliver Reiter for his academic input.

 

Footnotes:

[1] For an overview see https://www.ft.com/content/f5f60203-176b-4fd8-baa1-03f27afa3482.

[2] The model is based on the approach of Caliendo and Parro (2015).

[3] See https://www.iwkoeln.de/studien/thomas-obst-samina-sultan-juergen-matthes-was-droht-den-transatlantischen-handelsbeziehungen-unter-trump-20.html and https://www.boeckler.de/de/pressemitteilungen-2675-trumps-zollplaene-wuerden-deutsche-wirtschaft-empfindlich-treffen-64207.htm

[4] See https://www.brookings.edu/articles/usmca-review-upcoming-elections-and-a-path-forward/.

 

References:

Autor, D., A. Beck, D. Dorn and G.H. Hanson (2024), Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States, NBER Working Paper 32082. DOI 10.3386/w32082

Baldwin, R. (2024). Will Trump's tariffs on China harm US manufacturing?. Factful Friday (via LinkedIn). Bond, I., & Scazzieri, L. (2024). What a Harris presidency would mean for Europe. Centre for European Reform – Insight, 30. September.

Clausing, K. A., & Lovely, M. E. (2024). Why Trump's Tariff Proposals Would Harm Working Americans. PIIE Policy Brief, Mai.

Draghi, M. (2024). The Future of European Competitiveness. European Commission.