Wide Angle Shot: Trump tariffs - state of emergency for how long?

As expected, US President Trump announced severe tariffs on imports into the US on April 2. The new and wide-ranging tariff regime affects geopolitical rivals and (economic) partners of the US, including Europe and Japan, who have been closely linked for decades. Initially, a new global “baseline tariff” of 10% will apply to all US imports (from all countries) as of April 5. This has long been part of our economic forecasts. In addition, country-specific “reciprocal tariffs” are to come into force from April 9 (see here for country details). These are in the range of 20-46% for important trading partners (for some countries such as the UK, “only” the baseline tariff of 10% applies).

From an US perspective the reciprocal tariffs are intended to compensate for “perceived” (supposed) disadvantages in bilateral foreign trade relations (i.e. import duties of other countries and/or certain product regulations). In this respect, we see the reciprocal tariffs as more than just a temporary measure. In principle, the calculation of reciprocal tariffs focuses on bilateral trade deficits in goods trade (75% of global trade). According to official statements, the reciprocal tariffs are unlikely to affect certain goods and US imports, including copper, pharmaceuticals, semiconductors, wood, gold, energy or “certain minerals” that are not (easily) available in the USA (see here). In this respect, the tariff regime seems to have been chosen so that the US can maintain it for a while at least. The focus on trade deficits also suggests that the aim here is not just to create bargaining chips, but also to achieve a sustainable and sweeping change in global trade flows and value chains, structurally lower US imports as well as a relocation of production to the US.

Overall, the "reciprocal tariffs" are at the upper end of expected ranges. In this respect, there have certainly been noticeable share price losses and interest rate plus currency movements on the financial markets, even if certain risk measures (such as volatilities) have not risen to extreme levels. A certain amount of uncertainty prevails on the market, while market participants are desperately searching for an assessment of the US tariff measures in the medium and long term. The question of as to whether the financial markets calm down today and in the coming days or enter a further downward trend will also depend on whether certain market and sentiment barriers are triggered.

In an initial reaction, stock markets around the world fell significantly, in Europe by around 3%. However, the US stock markets led the list of losers — probably contrary to Trump's intentions — with the Nasdaq, which was down almost 4.5% at the market open. Concerns about international countermeasures against globally exposed US technology stocks are likely to be priced in here. In addition to the stock market, oil was also one of underperforming assets (-7%). Surprisingly, classic safe-haven investments also suffered losses today, such as gold (-1.5 %) and silver (-5 %). By contrast, government bonds lived up to their status as safe-haven assets. Yields on US Treasuries narrowed by 10 to 15 basis points (bp) across the curve, while yields on German government bonds fell by between 7-9 bp. Bonds from other European countries largely followed the Bund movement. On the sector side, the list of losers was led by sporting goods / fashion producers, banks and technology stocks, while the healthcare sector, utilities and consumer staples were among the positive outliers. EUR/USD showed a recognizable movement towards EUR strength and here the “new” quality of Europe and especially of government bonds and German Bunds as a “safe asset” is evident. In view of the outlined search for an outlook on the financial market, we would like to outline below our current thoughts on the further development of the Trump tariffs.

The new US customs regime is being implemented on the basis of legislation that assumes a national emergency. The extent to which the substantial and structural US trade and current account deficit with the rest of the world, which has accumulated over decades, can be described as a state of emergency is questionable. It is also questionable whether the measures taken can really reduce the USA's bilateral trade deficits or to what extent this is more about a pure focus on government revenue. However, from a formal legal point of view, the legal situation is sufficient for the measures taken.

The baseline tariff rate of 10% seems manageable to us. It should be noted here that, on a long-term average, annual movements in exchange rates for the most important currencies can be expected to be in the region of 10%. In this respect, we would consider this tariff rate to be digestible for the global economy. However, the additional bilateral tariffs have the potential to generate downside risks that are not easily digestible. After all, the average tariff rate for imports into the US rises to the range of 17-25%, depending on the calculation method. Since the Second World War, the overall effective average tariffs on US imports have been recognizably below 10 % and in recent decades have tended to be in the low single-digit range of 3-5 %. From a European perspective, around 70% of exports to the USA would be affected. Such major changes in the conditions for many players, which are also taking place rapidly, entail high economic risks that are difficult to calculate. Experience of how trade flows react to normal, smaller changes in the environment could be misleading. There is a risk that the upcoming distortions will not simply occur proportionally according to known patterns, but will be more severe. This is all the more true as the measures presented have been planned in secret, so to speak, and economic actors have hardly been able to prepare for them. In this respect, additional sentiment effects must be considered alongside traditional volume effects.

Overall, the new US tariff regime appears to be disruptive, but should not immediately plunge the US economy into a deep recession on its own. As long as there are no comprehensive countermeasures by trading partners, unilateral import tariffs imposed by a country as large as the US (e.g. in the magnitude of the baseline tariff rate) can lead to net prosperity effects. Including bilateral tariffs, however, the new US tariff regime also has the potential to generate economic and welfare losses for the USA in the short and medium term. This is particularly true for US consumers. In addition, lower-income households in the US in particular should suffer more from the effects of tariffs and inflation.

However, we think that the US administration will not quickly depart from its chosen path by the foreseeable negative consequences for the time being. In this respect we expect tough negotiations to reduce reciprocal tariffs. The political narrative will probably be that the US will have to go through a certain adjustment phase in order to become “stronger” in the long term. Furthermore, a blatant free trade skepticism has become established in US society and politics over the past decade. In this respect, the new tariff regime that has now been implemented enjoys broader social and political support, which is also partly reflected in the relevant official arguments (see here).

Given the current transactional US foreign and economic policy stance, everything seems negotiable at the moment. In principle, Trump and the US administration have held out the prospect of a willingness to negotiate on customs issues and probably on reciprocal tariffs. However, it is unclear in what format and at what point in time such negotiations could be conducted. We do not believe that there will be any substantial room for negotiation with the US in terms of a complete reduction in bilateral tariffs in the coming weeks and possibly even months. Selective cuts appear possible, of course, while there is also a risk of further short-term increases in the event of possible countermeasures by trading partners.

In the medium to longer term, the US administration could consider reducing reciprocal tariffs in stages over a period of years after an initial phase of validity and possible partial reductions in line with decreasing (bilateral) trade deficits. With such a negotiation strategy, the USA could also succeed in containing substantial countermeasures. In addition to fewer exports to the USA, more imports from the US should also reduce the prevailing tariff calculation basis. In this respect, negotiations will also focus on US exports (e.g. in the areas of energy, agriculture, etc.). However, such trade flow diversions take time and are not easy to implement in private sector economies such as in Europe. With the very differentiated reciprocal tariffs at the individual country level, the USA also creates a good negotiating position with individual countries, which then compare themselves with other countries that are perhaps (slightly) less affected. It should also be noted that at the core of the Trump administration the conviction prevails that the new tariff regime will pay off for the US in the long term, even if it may initially cause some disruption and upheaval in the real economy and on the financial markets.

The new tariff regime is essentially aimed at bringing industrial production back to the US in the medium and long term. We consider the argument to be conclusive only in some areas, but we do not expect a quick turnaround here. For example, the relocation of the production of simple consumer goods (e.g. from Asia to the US) seems less likely to us than that of industrial goods or cars. Furthermore, a noticeable rise in customs revenues in the coming months should enable the US administration to implement the currently overlooked but promised tax cuts over the course of the year or at least extend tax cuts beyond 2025. This could be an important step towards stabilizing economic sentiment in the US. After an initial rise in customs revenues and then a slow adjustment in trade volumes, it seems possible in the longer term that there will be some reduction in bilateral reciprocal tariffs. However, we do not expect the average US import tariff rate to quickly approach “only” the 10% basic tariff. In the medium to long term, we expect an average US import tariff rate (total imports) of around 10% compared to levels of 2-5% in recent decades.

China and the EU in particular need to be closely watched in terms of possible countermeasures from hard-hit major US trading partners. On the one hand, China could quickly take countermeasures and is also affected by further measures in terms of low-value imports into the US. On the other hand, negotiations with China could then possibly take place more quickly. It could be in the US interest to work against close coordination between major importers to the US (e.g. between China and the EU) more difficult. We also expect selective counter-reactions by the EU. After all, the major EU economic and trading nations like Germany, the Netherlands, Italy and France are substantially affected. Without a recognizable counter-reaction, European politicians could also appear weak in the face of the current populism trend. In this respect, the EU is likely to decide on relevant countermeasures the latest by the end of April and is apparently also preparing for the outlook that there will be possibly no swift results on the negotiation front. It would certainly be possible to take sensitive measures (such as taxing US service providers), but we do not expect a complete escalation on the part of the EU and do not (yet) see any willingness in economic and political circles to risk a full-scale tariff war. However, targeted measures in trade in services, which is not currently at the heart of the US tariff debate, should be conceivable. After all, the USA is the largest player in global trade in services and global exports of services. However, trade in services “only” accounts for just under 25% of the global trade volume (trade in goods accounts for around 75%). In this respect, drastic measures may have to be taken in this area, which could affect listed US companies and their customers (including in Europe).

At present, we do not believe that there will be any substantial negotiations or even results between the EU and the US in the coming days and weeks. The US could be anxious to play for time, especially with Europe. Moreover, we believe that the EU could be satisfied with the prospect of lower tariffs in the medium term and the introduction of certain media-effective counter-tariffs or levies. In our opinion, it would be important to work explicitly on the basis for calculating reciprocal tariffs and possibly have a constructive discussion about the calculation method. We believe that an emotional-fundamental opposition has little chance of success.

First of all, the prospect of bold and more sustained tariffs increases the downside risks for the US economy and, in particular, the risk of a stagflation scenario as new baseline. Economic growth of around 1% in the US with inflation above 3% seems quite likely to us for 2025 and would already imply a significant slowdown in economic momentum during the year. A certain weakening of the US economy and imports should then also lead to a reduction in bilateral trade deficits.

For Europe, there are direct negative effects from the burdens on US exports. In view of the USA's comprehensive approach, there is unlikely to be any shift in share to suppliers from other regions. Rather, the question arises as to what extent US buyers will find an alternative from their own country or do without certain goods altogether. Furthermore, if the tariffs are not fully passed on, this will squeeze the margins of US importers or European suppliers, who may reconsider their business activities due to a lack of profitability. In the medium term, this is not only expected to reduce the export activities of European companies, but — as the US administration hopes — will also raise the question of where to locate. Without these possible negative effects on investment activity, we put the direct negative GDP effects in Europe at between 0.2 % and 0.9%, depending on the country (excluding Ireland). In any case, the expected consequences are substantial enough for us to revise our GDP growth forecasts for the euro area downwards from 1.2 % to 1.0 % for 2025 and from 1.7 % to 1.5 % for 2026.

For the global economy, the risk of a recognizable slowdown in growth is increasing, while announced fiscal (stimulus) measures in Europe and China at least mitigate the downside risks towards a global recession scenario. In part, rising domestic demand here could compensate for the loss of demand caused by US tariff policy. We see the greatest economic risks for Asia given the overall high tariff rates for China and some other Asian countries.

Possible substantial countermeasures by China or the EU (including retaliation by the US) increase the global recession risk. However, we do not expect a global shock recession along the lines of the 1930s as long as the rest of the global economy remains in a cooperative mode — even in the event of countermeasures being taken against the US. It should be noted that, in contrast to the 1930s, the USA's share in global economy (depending on the calculation method) is no longer 45-50%, but 15-20%. For other reasons, too, we do not currently see any risk of a straightforward replay of a 1930s scenario. Based on the experience of recent years, we believe that the leading global central banks have the means — including the unconventional monetary policy toolbox — and the intellectual capacity to balance inflation and deflation risks well even in an escalation scenario, not allowing any excessive financial market dislocations. A complete and prolonged escalation of the tariff disputes (including further tariff increases by the USA and substantial countermeasures by the EU and China) would of course entail the risk of a global economic recession, with all the consequences for global risk asset markets in terms of “normal” bearish market reactions, including a more sustained period of subdued stock market performance.