Donald Trump is set to announce new customs duties that could significantly affect U.S. imports, with speculation around a potential flat tax or targeted tariffs. These duties, aimed at reducing the trade deficit and boosting domestic industries, may lead to a global economic slowdown and impact specific sectors, particularly in Europe. The repercussions could be swift, prompting foreign exporters to rush shipments, and potentially costing French households around 300 euros annually if retaliatory measures are not taken.
This Wednesday, Donald Trump is poised to unveil a new set of customs duties in a highly anticipated announcement. While the specifics remain unclear, the details will be disclosed at 10 PM (4 PM in Washington) from the White House. Speculation abounds: will the U.S. implement a flat 20% tax on all imports, or will there be customized duties based on the countries of origin? Alternatively, could a more restrained approach be taken, focusing on a select group of nations as suggested by various reports?
Global Economic Impact of New Customs Duties
In 2024, U.S. imports soared to approximately $3.3 trillion, exceeding France’s entire GDP. The implications for the global economy could be monumental. Economist Lionel Fontagné, who leads the Institute of Macroeconomic and International Policies at the Paris School of Economics, provides insights into this pivotal moment for international trade.
The first victim of customs duties is always the one who imposes them.
The first victim of customs duties is always the one who imposes them.
Lionel Fontagné
This new wave of tariffs could have widespread effects, unlike those seen during Trump’s first term. What are the potential repercussions?
The global economy is likely to experience a downturn. A key consequence will be a deceleration in global trade, influenced by the sectors targeted, the level of customs duties implemented, and what is termed ‘trade elasticity’—the responsiveness of production to price shifts. If all countries face similar tariffs, the situation may be less severe, as European and Japanese products would see comparable price increases in the U.S. market. However, if the tariffs vary among U.S. trading partners, the economic fallout could be significantly more pronounced.
Will the repercussions on the global economy be swift?
Foreign exporters may rush to deliver their goods before the new tariffs take effect. Production in Europe is anticipated to decline within one to two months post-implementation, as some shipments will have been pre-planned. In the short term, the United States could experience as much strain as its trading partners, if not more. The initial burden of customs duties falls on the imposing nation, as they face increased costs for imports, reduced competitiveness for their companies, and higher prices for essential components.
Why Is Europe in the Crosshairs?
Implementing these customs duties will bolster U.S. production at the expense of imports, triggering a shift in market shares toward domestic industries. During his first term in 2018, Trump successfully halved the U.S. trade deficit with China, and now, Europe is under scrutiny. The European trade surplus with the U.S. accounts for one percentage point of U.S. GDP, and Trump aims to eliminate this imbalance. The strategy may focus on specific sectors: targeting German automobiles, Irish pharmaceuticals, French wines and spirits, cosmetics, and luxury goods.
The cost of this trade war will be around 300 euros per year per French household.
The cost of this trade war will be around 300 euros per year per French household.
Lionel Fontagné
What might the consequences of this trade war be for France?
Should Europe refrain from retaliatory measures, the economic slowdown may help mitigate inflation, leading to a relatively painless adjustment. However, potential losses in access to the American market could equate to a GDP reduction of 0.2 to 0.3 percentage points. This translates to an estimated cost of around 300 euros annually for each French household, a significant financial burden.
Does Europe possess the means to counter these actions?
One strategy involves levying customs duties on products primarily exported by ‘swing states’—those American states with fluctuating electoral outcomes. In the past, Europe targeted Kentucky bourbon, Harley Davidson motorcycles, and Florida orange juice, but these tariffs were suspended following an agreement that expired on March 31 of this year. Additionally, Europe has established an anti-coercion mechanism in 2023 amid a trade dispute with China, granting it the ability to restrict access to European markets, prohibit foreign investments, impose additional taxes, or prevent companies from offering certain services within Europe. This leverage could be utilized to compel the United States to negotiate.