①Goldman Sachs believes that a 10% tariff would reduce the real GDP of the affected European countries by 0.1 to 0.2 percentage points through decreased exports; ②The inflationary impact could be very minimal, with the Taylor Rule pointing to a moderate reduction in policy interest rates, ceteris paribus.
Cailian Press, January 20 (Editor: Xiaoxiang) Last weekend, former U.S. President Trump announced that starting from February 1, a 10% tariff would be imposed on all goods exported to the U.S. from Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland, with the tariff rate increasing to 25% starting June 1 until an agreement is reached on the "complete and absolute purchase of Greenland."
Although there remains significant uncertainty regarding whether the aforementioned tariff threat will materialize, Goldman Sachs, in its latest research report, still conducted a comprehensive analysis of the potential impacts.
Goldman Sachs believes that a 10% tariff would reduce the real GDP of the affected European countries by 0.1% to 0.2% due to decreased exports. Meanwhile, the inflationary impact may be very minimal, with the Taylor Rule suggesting a moderate reduction in policy interest rates, assuming all else remains constant.
In terms of countermeasures, Goldman Sachs economists believe that the EU might take retaliatory actions at three levels, while the threshold for the UK to retaliate would be higher, consistent with the UK's stance during last year’s trade negotiations.
Below are the key highlights from Goldman Sachs' report:
①Trump has announced that the U.S. will impose a 10% tariff on imports from eight European countries (Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland) starting February 1, with plans to increase the tariff to 25% on June 1 until the U.S. reaches an agreement to purchase Greenland.
Goldman Sachs believes that whether these tariffs can be implemented remains highly uncertain.
②The tariffs announced by Trump will apply to several EU member states with annual exports to the U.S. worth approximately €270 billion—about half of the EU’s total exports to the U.S.
If implemented as a blanket tariff on all exports to the U.S., the affected export volume would account for 3% to 3.5% of Germany, the Netherlands, and Finland’s GDP; if applied only to goods currently impacted by U.S. reciprocal measures, the affected export volume would represent 1.5% to 2% of these three countries’ GDP. The total affected export volume accounts for 1% to 1.5% of the Eurozone's GDP and 1% to 2% of the UK’s GDP.
Goldman Sachs estimates that if the United States imposes an additional 10% tariff, the real GDP of affected countries will decline by 0.1 to 0.2 percentage points due to trade contraction.
Among these, Germany will be hit the hardest: if a 10% incremental reciprocal tariff (the most likely scenario) is imposed, its GDP will decrease by approximately 0.2 percentage points; if a comprehensive tariff is implemented, it will drop by 0.3 percentage points. The overall GDP drag for the Eurozone will be around 0.1 percentage points, similar to the impact on the UK.
If negative effects on confidence or financial markets emerge, the impact could expand. However, if countries reroute trade through EU nations unaffected by the additional tariffs, the drag effect will weaken. If tariffs rise to 25%, the GDP impact on each country will increase to 0.25-0.5 percentage points. All these GDP losses will compound the 0.4 percentage point real GDP drag caused by last year's tariff hikes.
The inflationary impact may be negligible (assuming no retaliatory measures), as reduced demand will suppress inflation. Under a simplified Taylor rule where central banks respond to GDP and inflation, policy rates may see a slight reduction.
Goldman Sachs identifies three potential levels of retaliatory measures the EU could take against further US tariff increases:
1) Delaying the implementation of the US-EU trade agreement – because the agreed tariff reductions on US goods require approval from the European Parliament. Goldman Sachs believes the threshold for the EU to take this action is relatively low.
2) Imposing retaliatory tariffs on US goods based on the countermeasure list approved last year. This includes: a €25 billion list (equivalent in scale to the US steel and aluminum tariffs, covering soybeans, copper, iron, motorcycles, orange juice, etc.); or the previously proposed €93 billion list of US imports (covering a broader range of tariffs, including aircraft, automobiles, and agricultural products). Retaliatory tariffs will exert moderate mechanical upward pressure on European inflation.
3) Activating the 'Anti-Coercion Instrument' (ACI), which was specifically designed for such situations. Activation does not imply immediate implementation (which requires multiple steps) but signals that the EU may take action while leaving room for negotiations. The anti-coercion mechanism may involve policy tools broader than tariffs, such as investment restrictions or taxation on US assets and services (e.g., digital services).
The threshold for the UK to take retaliatory measures is higher, consistent with its stance during last year’s trade negotiations. Goldman Sachs expects the UK to focus on diplomatic channels to communicate with the Trump administration, as recently hinted by UK Secretary of State for Culture, Media, and Sport Lisa Nandy in an interview.
Editor/Rice
