This is stated in a recent analytical note of the German economic institute ifo. With a competent EU strategy, new trade agreements with Mercosur, India and other countries can not only compensate for losses from U.S. tariffs, but also strengthen Europe’s position, experts believe.
The authors of the paper push the EU towards active trade expansion and suggest accelerating the conclusion of trade agreements with seven partners – Mercosur (an association of South American countries), India, Indonesia, UAE, Malaysia, Thailand and Australia.
Currently, the EU does not have a fully functioning free trade agreement with any of these countries, but such a document has already been signed with Mercosur (due to enter into force in May), some agreements have been reached with India, Australia and Indonesia, and negotiations with the others are ongoing.
Consequences of the tariff war
In the baseline scenario presented in the paper, it is a question of maintaining the current terms of trade between the EU and the US, i.e. a combination of sectoral US duties, including on steel, aluminum and automobiles, with a 15% tariff on European products in general.
The consequences for the EU if such a regime is maintained do not look too large at first glance: total exports are reduced by about 1 percent and GDP by 0.08 percent. However, the relatively small deterioration of overall indicators hides a more pronounced decline in the sectors that form the export potential of the European economy, the paper says.
This includes the automotive and light industry, as well as metallurgy: it is in these sectors that value added, i.e. their contribution to output and economic growth as a whole, is declining.
The window of opportunity is open
Thus, India and Mercosur could become the largest partners of the union as a whole, the UAE and Australia are important above all as markets, and Malaysia, Thailand and Indonesia as sources of imports. For Europe, this means an opportunity not only to expand exports, but also to partially diversify purchases.
The paper identifies two scenarios: the first assumes a partial reduction of barriers, the second – their almost complete abolition. Even in the first case, total EU exports increase by about 1.3% compared to the “pre-tariff” level, i.e. fully compensate for losses from US restrictions. With deeper integration, the growth reaches already 3.4%. EU GDP in these scenarios increases by 0.18% and 0.43% respectively.
The most noticeable reversal of dynamics is forecasted in industry, and a serious growth of value added is expected also in the manufacturing sector. Less competitive sectors, such as clothing, may face additional pressure from imported products from partner countries.
Agriculture and extractive industries also show a moderate contraction of business activity in the scenarios described, but the authors separately emphasize that in reality, full trade liberalization in these segments is unlikely, and therefore the scale of losses may be much more modest.
