The macroeconomic effects of import tariffs on the euro area: a model-based assessment

We use a multi-country New Keynesian model of the global economy to assess the macroeconomic effects on the euro area (EA) of an increase in tariffs on U.S. (US) imports, either unilaterally or with retaliatory tariffs by the EA, China (CH) and the rest of the world (RW). Our results are as follows. First, EA output decreases to a larger extent (slightly more than 1% at the trough) under the retaliation scenario than under that of an increase in US tariffs with no retaliation (0.5%). The additional decrease is due to the drop in domestic aggregate demand, only partially offset by the increase in exports to CH. Second, an increase in global trade policy uncertainty reduces aggregate demand and, thus, has recessionary and disinflationary effects on the EA and global economies (EA GDP falls by 1%). We also consider a portfolio rebalancing towards financial assets issued by the EA, CH, the RW. This would induce a depreciation of the US dollar and (modest) expansionary and disinflationary effects on countries other than the US.