The German economy, already in decline, could be about to lose 1% of GDP due to the trade tariffs, promised by US President-Elect Donald Trump.
The German economy, although still the biggest in Europe, could be derailed by US President-Elect Donald Trump’s policy agenda, promising hefty trade tariffs which could cost 1% of Germany’s GDP.
Throughout his campaign, Donald Trump has been talking about 10-20% blanket tariffs on imports, including those from Europe.
Even though a trade tariff, a tax levied on foreign goods as they enter a country, would be paid by Americans, it would ultimately contract the market for foreign products, according to experts.
“Germany is particularly exposed to the blanket import tariffs that Trump has threatened,” Emily Mansfield, Regional Director for Europe at Economist Intelligence Unit (EIU), said to Euronews Business, adding that the country “is a highly export-oriented economy, and runs a large trade surplus with the US.”
Just before the self-proclaimed tariff man Donald Trump was re-elected, German exports reached their highest levels of goods to the US in decades, according to the Federal Statistical Office of Germany.
Germany ran a €63.3bn trade surplus with the US in 2023, when nearly one-tenth of German exports went to the US, worth €157.9bn.
The potential damage Trump’s tariffs would bring to the German economy is feared to equal 1% of the GDP.
“If the tariff plans are implemented, it could cost us one percent of economic output in Germany,” German Bundesbank President Joachim Nagel told German newspaper Die Zeit, adding that “that is painful, especially since the German economy is not growing at all this year and will probably only grow by less than one percent next year. If the new tariffs are actually imposed, we could even slip into negative territory.”
For context, 1% of German GDP translated to €42bn in 2023. However, over 4 years of the Trump Presidency, Germany could experience a loss in GDP of over €127bn-180bn, according to a report by the German Economic Institute (counting a 10%-20% tariff on imports to the US from Europe).
Even without any negative prospects, the German economy is already struggling, with global demand squeezing the export-oriented country’s output, the German manufacturing sector in crisis – and the resulting impact of the energy crisis triggered by the war in Ukraine. Moreover, the country has to contend with the collapse of its government and the snap elections scheduled for February 2025.
There are expectations, even from the federal government, that the German economy is going to shrink slightly this year.
US investment bank Goldman Sachs also expects German GDP to contract by 0.1% this year and grow by 0.5% and 1% respectively in 2025 and 2026.
What sectors are most threatened?
According to the ifo Institute, a potential 20% duty on imported goods could lead to German exports to the US falling by around 15%.
“The automotive sector is likely to be in the firing line for Trump (Germany exports a lot of luxury cars to the US market), but we expect steel and aluminium, chemicals and pharmaceuticals to also be exposed to these trade tariffs,” said Mansfield.
In an unlikely scenario of the US keeping the tariffs on Chinese EVs but not on German ones, the US could provide a booming market for the European automotive sector, one where it doesn’t have to compete with Chinese models. But Trump is likely to favour carmakers manufacturing in the US.
The new Trump-era will “likely entail renewed defence spending and security pressures for Europe,” according to Goldman Sachs, but they expect a limited growth boost in this sector. In Germany in particular, fiscal constraints could ”prevent a sharp uptick now,” Mansfield added.
All in all, exporters may have some good news before the tariffs kick in. In the short term, US importers may front load their orders in order to beat the tariffs. “Robust US growth and a strong dollar will also support US demand for German goods,” she said.
A looming trade war
Economists fear a trade war between the US and the EU, the latter having exported €502bn in goods to the US in 2023, making up a fifth of all non-European Union exports.
However, there is no expectation that the incoming US President will be in a rush to impose all tariffs at once, especially with some pushback from the US private sector, potential legal challenges and negotiations to agree carve-outs with important trade partners (including the EU) could delay the process.
“We expect tariffs to be imposed in the second half of 2025, with the main economic hit coming in 2026,” said Mansfield.
The Regional Director of Europe at Economist Intelligence thinks that the “EU will use a mixture of carrots and sticks to try to strike a deal with Trump”.
Brussels-based think tank Bruegel writes in their analysis that such an agreement could include EU purchases of US natural gas, agricultural products and arms, to be done as part of a deal.
Meanwhile, heightened trade uncertainty may cause more damage than the actual tariffs.“Much of the growth drag would come from higher trade policy uncertainty (TPU)—rather than the actual tariff increases themselves—consistent with the 2018-19 experience,” read Goldman Sachs’ latest report ‘Economic Implications of Trump’s Re-election for Europe’.
The current political turmoil is also limiting the German government’s effectiveness in responding to the various pressures on firms at the moment. “The likelihood of concerted action to address the economy’s structural constraints (including the poor demographic profile, an investment deficit with peer economies, automotive firms calling behind Chinese competitors etc) seems low,” Mansfield also noted.
