Full-blown trade wars weaken EU GDP by 2.5 percent
Potential full-blown US-China and US-EU trade wars could significantly impact European economies. In the short term, GDP decline by 2.5%, and by 1.7% over time, mainly due to productivity losses. The effects vary across EU countries, with those more exposed to China hit hardest as Chinese firms seek new markets.
The threat of US-China-EU trade wars is growing, and tensions may escalate further after the US election. So far, tariff increases have targeted specific products, including solar panels, washing machines, steel, and aluminium under Trump, and recently, electric vehicles under Biden.
If Trump wins the presidency, he has proposed significant tariff hikes: 10% on EU imports and 60% on Chinese imports has been suggested. This analysis, using Oxford Economics' global model, examines how these tariffs, implemented in 2025, would affect Euro-pean economies. The impact is severe, with GDP expected to drop by as much as 2.5% by 2027. This corresponds to 391 billion EUR or 870 EUR per capita. Further, employment drops by 0.7% corresponding to 1.7 million jobs.
The short-term effects are more pronounced. It is assumed that the Fed and ECB maintain higher interest rates longer, fearing inflation from tariff-driven cost increases. Meanwhile, consumer confidence in both the US and EU declines, further depressing GDP.
By 2029, employment returns closer to baseline levels, but GDP remains 1.7% below baseline due to substantial productivity losses. These losses are largely driven by reduced international trade, which limits the efficiency gains from global production allocation.
All EU-countries loose – but to a very different degree
There is significant variation in GDP declines across EU countries. The Czech Republic and Ireland are among the hardest hit, with GDP dropping by up to 4%. This is due to the Czech Republic’s heavy reliance on trade with China and Ireland's strong ties to the US. In contrast, countries like Greece and Cyprus are less affected, with GDP falling by only 1%, as their exposure to Chinese imports is low.
The declines in GDP are likely to be felt by the citizens of Europe in terms of a lower income. On average, the decline in GDP corresponds to a drop in GDP per capita on 870 EUR in 2027. However, large variations within the EU exists ranging from a massive 4,000 EUR in Ireland to 200 EUR in Bulgaria.
The trade wars also lead to significant employment declines, though these vary widely across countries, with drops in 2027 ranging from 0.1% to 1.2%. The largest employment declines are short term, driven by contractionary monetary policies and reduced consumer confidence, resulting in lower consumption and job losses.
By 2027, reduced international trade results in severe productivity losses of up to 3%, making productivity the primary driver of lower long-term GDP. In fact, the correlation between productivity declines and GDP drops across countries is a striking 0.97.
Change in trade balance is a good predictor of productivity losses
Most countries see a decline in their trade balance, especially those heavily reliant on imports from China. When the US imposes higher tariffs on Chinese goods - 17% of which are exported to the US - China will seek new markets, particularly in the EU.
This increases competition for European firms as Chinese goods may be sold below market value. However, some countries, like Cyprus and Greece, could improve their trade balance, as they primarily source imports from Europe and Turkey, where tariffs remain unchanged.
Countries with significant declines in their trade balance also face sharp productivity losses. The correlation between changes in trade balance and GDP across countries is 0.67, underscoring the crucial role trade plays in driving productivity gains.
Countries exposed to exports from China more affected
Higher US tariffs make it harder for Chinese firms to compete, prompting them to seek new markets, especially in the EU. EU countries most exposed to Chinese imports, measured by their output multiplier, experience the largest GDP declines in the longer run. This underscores the competitive pressure from Chinese firms entering EU markets.
Countries with significant exports to the US are also more adversely affected by increasing tariffs on EU exports. However, this correlation is not as strong as that observed with US-China tariffs, primarily due to the larger scale of the US-China trade war.
