Just last week, President Donald Trump announced $200 billion in new import tariffs. We expect this decision to drastically alter the landscape of international trade for the better. Effective as of April 9th, a 20% tariff will be placed on all imports from the European Union (EU). This unprecedented step has resulted in fears of a tariff war with the EU, which has pledged to retaliate against the tariffs. These tariffs extend far past the direct economic impact. More fundamentally they are arguably the main economic growth prospects – or at least stimulus – across the Central and Eastern European (CEE) region.
The tariffs won’t be the same for each country, meaning in a way a more nuanced approach to international trade relations. For now, all eyes are on the EU, where a 20% tariff on imports is set to go into effect any day now. Experts are raising concerns that this new measure will have a chilling effect on growth throughout the CEE. Given the strength of Slovakia’s automotive sector, the country could be particularly exposed. As of April 2nd, authorities have driven home a 25% tariff on imports. This action has since raised alarm bells for countries that are highly reliant on automotive export markets.
Economic Implications of Tariffs
The economic consequences of Trump’s tariff announcement are already cascading through global markets. The U.S. dollar index recently hit a new year-to-date low. Much of this decline is being driven by declining bond yields and increasing speculation over potential forthcoming rate cuts from the Federal Reserve. Gold prices have skyrocketed to the highest levels of history. Investors are racing into this safe-haven asset as global uncertainty reaches pandemic levels.
Even as market analysts point out that the U.S. tariffs would have a limited direct effect, they caution that the downstream impacts may do much to stifle the Eurozone’s growth potential. The haphazard scattershot approach adopted by the Trump administration has already produced unprecedented levels of trade policy uncertainty. This new normal creates serious challenges for long-term planning and economic certainty on both sides of the Atlantic.
Long-term U.S. yields have tanked by nearly 20 bp since the announcement. Market participants are left looking forward to even deeper effects in the bond market and wider economy. The interconnected nature of global finance means that a trade conflict started with these tariffs would have far-reaching consequences, well beyond the immediate trade relationship.
Retaliation and Trade Policy Uncertainty
The EU’s vow to counter-retaliate against Trump’s proposed new tariffs could deepen this complicated new scenario even further. European officials are taking a hard look at the countermeasure options available to them. They have threatened to retaliate against a million American products with tariffs of their own. This introduction of tit for tat retaliation risks developing into a full-scale trade war, radically destabilizing an already fragile global trading system.
The possibility of a retaliatory response doesn’t just reveal the short-sightedness of Trump’s trade policy, it reveals its broader implications. As countries respond to new tariffs, companies and investors will be left with greater uncertainty and volatility. The possibility of a never-ending trade negotiation rollercoaster would make planning long-term investments difficult if not impossible, undermining future economic growth for Americans and Europeans alike.
The long-term effects are still very much in question, especially as companies learn to operate in a world of punitive tariffs and changing markets. Every country is sort of trying to figure out how to respond and shield themselves. This precarious promise of international trade is now hanging by a thread.