Trump tariffs would shave at least 1.2% off German GDP by 2028, IW study shows

By Sarah Marsh

BERLIN (Reuters) - Germany's economy would contract by at least 1.2% by 2028 should former U.S. President Donald Trump regain office and hike import tariffs as much as he has proposed, the German Economic Institute (IW) argued in a paper on Monday.

The IW, which is financed by prominent German business associations and carries weight among Berlin policymakers, published the paper a day ahead of "Super Tuesday", the day in the U.S. presidential primary cycle when the most states vote.

The front-runner for the Republican presidential nomination has proposed slapping a 10% tariff on all imports and hiking those on Chinese imports by 40 percentage points to 60% were he to defeat President Joe Biden in the Nov. 5 U.S. election.

This tariff shock would temporarily shave 1-1.4% off U.S. economic output in the early years mainly due to higher consumer prices and unemployment weighing on consumption and a confidence shock that would affect investment in the short term, according to the IW study.

But improvements in the trade and fiscal balance would allow U.S. gross domestic product to recover to be only slightly negative by 2028.

The impact on Europe and particularly on export-oriented countries like Germany would be much more severe, according to the IW study, even as they already struggle with high energy prices and a lack of skilled labour.

German GDP would drop by 1.2% by 2028, hit by the fall in exports and a subsequent drop in private investment, the study showed. If China were to retaliate with its own 40 percentage point hike in import duties, it could drop as far as 1.4%.

"The EU should prepare for such a scenario now," the IW warned. "The EU should use the remaining term of President Biden to put the trade relations with the US on a more solid footing."

This would entail institutionalising the EU-U.S. Trade and Technology Council, signing a critical minerals agreement as well as concluding a deal on the trade of green steel and aluminum, it said.

The EU should also sign more free trade agreements with partners such as Australia, the Mercosur, Indonesia, or India.

"Second, if Trump was elected and would threaten to implement new trade barriers against the EU, the EU should be able to react," the IW said. "To counter such a threat, the EU should also threaten credible retaliation."

(Reporting by Sarah Marsh; Editing by Kirsten Donovan)