By our Principal Economist Dr. Laura Galdikiene
The eurozone economy ended last year on a weak note, with real GDP expanding by just 0.1% in Q4. However, hopes for recovery are now facing headwinds from escalating trade tensions, as recent U.S. actions threaten stability for both policymakers and businesses. The U.S. president recently announced a 25% tariff on imports from Mexico and Canada (later postponed), a 10% tariff on Chinese imports, and a blanket 25% tariff on steel and aluminum. Further measures by the U.S. will aim to counteract both tariff and non-tariff barriers, including subsidies, VAT, and currency devaluation.
For European exporters, these trade restrictions could lead to weaker demand, supply chain disruptions, and reduced profits. If retaliatory tariffs emerge in the EU, the European Central Bank may struggle to balance inflation control with rate cuts, potentially worsening economic prospects. However, the uncertainty surrounding trade itself may stall growth—delaying investment and curbing consumer spending. The Trade Policy Uncertainty Index, which tracks the frequency of articles referencing trade policy and uncertainty, has reached record highs since the U.S. election, reflecting widespread economic unease. Businesses that once pursued expansion plans are now reconsidering their strategies, favoring a cautious “wait and see” approach in a highly unpredictable environment.
History shows that trade wars result in no winners—only economic casualties. This year marks the 95th anniversary of the Smoot-Hawley Act, a 1930 U.S. law that raised tariffs on over 20,000 imported goods, triggering retaliatory measures and worsening the Great Depression by restricting global trade. Today, the increasing complexity of global supply chains makes trade restrictions even more disruptive than in the past. Policymakers must recognize that cooperation, not conflict, is key to ensuring stability and long-term growth.
For businesses, navigating this uncertainty requires resilience and strategic planning. While global trade remains volatile, informed decision-making, adaptability, and diversification will help businesses weather the storm.
