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The German economy, although still the largest in Europe, could be derailed by US President-elect Donald Trump’s policy agenda, which promises heavy trade tariffs that could cost Germany 1% of its GDP.

Throughout his campaign, Donald Trump has been talking about imposing a 10-20 percent blanket tax on imports, including those from Europe.

Although the trade tariff, a tax imposed on foreign goods when entering a country, would be paid by Americans, it would ultimately shrink the market for foreign products, experts say.

“Germany is particularly exposed to the blanket import tariffs threatened by Trump,” Economist Intelligence Unit (EIU) Regional Director for Europe Emily Mansfield told Euronews Business. “There is a huge trade surplus with the US.”

Just before the re-election of self-proclaimed tariff warden Donald Trump, German exports to the United States reached their highest level in recent years, according to Germany’s Federal Statistical Office.

While Germany had a trade surplus of 63.3 billion euros with the USA in 2023, almost a tenth of Germany’s exports went to the USA, worth 157.9 billion euros.

It is feared that the potential damage that Trump’s tariffs will bring to the German economy is equal to 1 percent of GDP.

German Bundesbank President Joachim Nagel told the German newspaper Die Zeit, “If the tariff plans are implemented, it could cost us one percent of economic production in Germany,” adding: “This is very painful, especially since the German economy has not grown this much this year.” It will likely grow by just under one percent next year. “If new tariffs are actually implemented, we could even slide into negative territory.”

For context, 1% of Germany’s GDP amounts to €42 billion in 2023. However, according to a report by the German Economic Institute, there could be a loss of between 127 billion and 180 billion euros in Germany’s GDP over the 4 years of Trump’s presidency (this figure also takes into account a 10% increase in imports from Europe to the USA). -20 customs duty).

Even without any negative expectations, the German economy is already struggling with global demand squeezing the export-oriented country’s output, German manufacturing in crisis, and the resulting impact of the energy crisis triggered by the war in Ukraine. Moreover, the country has to deal with the collapse of its government and early elections scheduled for February 2025.

There are expectations even from the federal government that the German economy will contract slightly this year.

US investment bank Goldman Sachs also expects German GDP to contract by 0.1% this year, and to grow by 0.5% and 1% in 2025 and 2026, respectively.

Which sectors are most under threat?

According to the Ifo Institute, a potential 20% tax on imported goods could cause German exports to the US to fall by about 15%.

“The auto industry will likely be in Trump’s line of fire (Germany exports a lot of luxury cars to the US market), but we expect steel and aluminum, chemicals and pharmaceuticals to also be subject to these trade tariffs,” Mansfield said. .

In an unlikely scenario where the US maintains tariffs on Chinese electric vehicles but not on Germany, the US could provide a thriving market for the European automotive industry where it would not have to compete with Chinese models. However, Trump will probably prefer automakers that produce in the United States.

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According to Goldman Sachs, the new Trump era “will likely require renewed defense spending and security pressures for Europe,” but they expect a limited increase in growth in this sector. Fiscal restrictions, especially in Germany, “could prevent a sharp rise at the moment,” Mansfield added.

As a result, exporters may have some good news before the tariffs go into effect. In the short term, U.S. importers may front-load their orders to bypass tariffs. “Strong growth in the US and a strong dollar will also support US demand for German goods,” he said.

Coming trade war

Economists fear a trade war between the US and the EU; The EU will export 502 billion euros of goods to the USA in 2023, accounting for a fifth of all exports outside the European Union.

However, there is no expectation that the incoming US President will rush to impose all tariffs at once, particularly due to some pushback from the US private sector, potential legal challenges, and negotiations to reach an agreement with major trading partners (including the US). EU) may delay the process.

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“We expect the tariffs to be implemented in the second half of 2025, with the real economic hit coming in 2026,” Mansfield said.

Economist Intelligence’s Regional Director for Europe thinks that “the EU will use a mixture of carrots and sticks to reach an agreement with Trump.”

Brussels-based think tank Bruegel writes in its analysis that such a deal could include EU purchases of US natural gas, agricultural products and weapons as part of the agreement.

Meanwhile, increased trade uncertainty could cause more damage than actual tariffs. “Most of the growth drag will come from higher trade policy uncertainty (TPU) rather than actual tariff increases, consistent with the 2018-19 experience,” Goldman said. Sachs’ latest report is ‘The Economic Effects of Trump’s Re-Election on Europe’.

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Current political turmoil also currently limits the effectiveness of the German government in responding to various pressures on companies. Mansfield also said, “The likelihood of concerted action to address the structural constraints of the economy (including the weak demographic profile, the investment gap in peer economies, automotive companies’ support of Chinese competitors, etc.) seems low.”