Trade wars and global spillovers. A quantitative assessment with ECB-global

This paper examines the macroeconomic impact of substantial tariffs imposed by the second Trump administration on imports from China and the euro area and their transmission through direct and indirect channels. Using the ECB-Global 3.0 semi-structural model, we show that tariffs raise US import prices and lead to tighter US monetary policy, with the managed float of the renminbi partly offsetting adverse effects in China, while appreciation of the dollar undermines US export competitiveness. In the euro area, euro depreciation provides limited output support but intensifies imported inflation and triggers additional policy tightening. We assess the sensitivity of these results to key assumptions, such as the global amplification of inflation via dominant US dollar invoicing, partial trade diversion, and alternative monetary policy frameworks that attenuate monetary tightening and output contraction. Quantitative assessments of tariffs enacted up to 26 May 2025 and of an escalation scenario indicate significant global output losses and heightened inflationary pressures, requiring widespread policy rate increases. Further escalation of the trade conflict magnifies these effects. These findings quantify the economic cost of tariff related trade disputes and highlight the challenges central banks face in navigating the trade off between price stability and growth. JEL Classification: F12, F41, F42