President-elect Donald Trump’s potential trade tariffs have sparked concerns about inflation in the Eurozone, but Citi economists argue that they may actually be deflationary. Even if the EU retaliates with its own tariffs, the impact on the Harmonised Index of Consumer Prices (HICP) is likely to be negligible, the economists say.
Only around 10% of goods imports in the euro area come from the US, and most of those are energy-related, which are unlikely to be subject to tariffs. Furthermore, the import price-to-HICP passthrough for consumption goods is typically low. The potential 10% tariff on EU goods, combined with additional measures against China, could further weaken Eurozone economic growth, which is already struggling.
The tariffs could also harm Eurozone exports, as US and Chinese demand would decline. However, Eurozone exporters have previously benefited from trade diversion as the US has reduced its reliance on China. Looking to past trade disputes, the surge in Chinese import penetration has had significant disinflationary implications for Europe, suggesting that tariffs may actually lead to lower prices and lower inflation.