The German economy, which is already facing challenges with declining growth and struggling export-oriented sectors, is now at risk of losing an additional 1% of GDP due to the trade tariffs promised by US President-Elect Donald Trump. With Trump threatening 10-20% blanket tariffs on imports, including those from Europe, Germany, as an export-oriented economy with a large trade surplus with the US, is particularly exposed to the potential impact of these tariffs. Experts estimate that if implemented, the tariffs could cost Germany 1% of its economic output, equivalent to €42bn in 2023 alone, with a potential loss of €127bn-180bn over the course of Trump’s presidency.
The repercussions of Trump’s proposed tariffs extend beyond just economic impacts, with the German economy already grappling with challenges such as global demand constraints, the crisis in the manufacturing sector, and the energy crisis resulting from the war in Ukraine. The collapse of the government and snap elections scheduled for February 2025 further add to the uncertainty surrounding the country’s economic outlook. Forecasts from sources like the German Economic Institute and Goldman Sachs suggest a slight contraction in German GDP in the coming years, with some sectors like automotive, steel, aluminum, chemicals, and pharmaceuticals expected to bear the brunt of the tariffs.
Despite the looming threat of a trade war between the US and the EU, analysts believe that Trump may not rush to impose all tariffs at once, allowing for negotiations and potential carve-outs with important trade partners like the EU. The timeline for tariff implementation is anticipated to be in the second half of 2025, with the full economic impact likely to be felt in 2026. The EU is expected to use a combination of incentives and pressure to negotiate a deal with Trump, potentially involving increased purchases of US products. However, the heightened trade uncertainty from the tariffs could have a more significant impact on growth than the tariffs themselves, as seen in past trade policy uncertainty experiences.
In the short term, German exporters may benefit from US importers front-loading their orders to avoid the tariffs, while robust US growth and a strong dollar could also support demand for German goods. However, concerns remain about the long-term implications of a trade war between the US and the EU, with potential legal challenges and negotiations expected to delay the full implementation of tariffs. The German government’s ability to address the structural constraints facing the economy, such as demographic challenges, investment deficits, and competitiveness issues, is further hindered by the ongoing political turmoil. Despite these challenges, there is hope that some sectors could experience growth if a trade deal is struck with the US, although fiscal constraints and other factors may limit the magnitude of any potential upswing.
