Today is so-called ‘Liberation Day’, when President Trump looks set to impose 25% tariffs on imports from a range of countries. In response, some commentators have predicted an economic catastrophe, whilst others believe that tariffs will create nothing more than economic headwinds. In this article I try to differentiate between those countries and sectors most at risk and those which will be less affected.
Firstly, it is worth pointing out that some countries and trading blocs are more likely to be targeted by President Trump’s levy of ‘reciprocal’ tariffs than others. These will include those which not only have high tariffs but also those which run large trade surpluses with the country. According to UNCTAD, countries/blocs falling into this category include:
A much smaller group of countries have no significant trade surplus and similar tariffs to the US. These include:
Looking at one of the most ‘at risk’ trade blocs, the EU, investment bank, ING, estimates that in the short term (1-2 years) a 25% tariff on EU imports would reduce exports by 19% which, in turn, will result in a decrease in GDP of 0.33%. As the US manufacturing industry grows to adapt to the new regime by developing domestic supply chains, this reduction in EU GDP could increase to 0.87%. Germany accounts for about a third of all EU’s exports to the USA. However, as it also exports a large proportion of goods to the rest of the world, its exposure is mitigated – exports to the US are only a fifth of its extra-EU trade. Most exposed is Ireland: 46% of its extra-EU trade goes to the USA as a result of the tax breaks it offers US companies especially those in the pharmaceutical industry. ING believes that 9.7% of Ireland’s economy is exposed to the impact of tariffs.
According to the Centre for European Reform (CER), trade’s share of EU GDP was 22.4% in 2023 and rising, compared with 18.6% in China and just 12.7% in the US. Whilst trade with the US is just a small component of this amount, the bloc is particularly reliant on trade openness and will be vulnerable to any new barriers, especially if these become the ‘new normal’ for all trade partners.
The markets in the second group, with no significant trade surplus and similar tariffs to the US, will no doubt find it much easier to negotiate a ‘carve out’, especially if they are able to offer something in return, such as a commitment to buying American oil and gas, for instance.
But, despite the concerns, will European businesses and consumers actually materially notice the tariff increases? Economic consultancy, Oxford Economics says in a report that, ‘Neither the EU nor the US have much supply chain reliance on one another. This may make tariffs more justifiable from President Trump’s perspective and embolden the EU to retaliate against them.’ This opinion suggests that the severity of impact will be limited to certain parts of the economy rather than more generalised.
On a sector basis, the pharmaceuticals industry in the UK, Ireland, Germany, Denmark and Switzerland could be some of the hardest hit. In some cases, companies will be able to relocate production to existing US production facilities, should they have them, although this can take at least a year. Establishing new factories requires considerable investment and involves even longer regulatory lead times. For this reason, global pharma companies are pushing for a phased approach to tariff implementation which will allow them time to rebalance their supply chains. As with all aspects of the tariff policy, some companies will be affected more than others. Novo Nordisk, for example, producer of obesity and diabetes drugs, Wegovy and Ozempic, has commented that it has a ‘very significant’ manufacturing base in the US and, so far, senior management has been sanguine about the impact of tariffs.
India, a centre of manufacturing for cheap generic drugs, will undoubtedly be affected. Given that it is unlikely that Indian manufacturers will relocate production to the USA, not least as their business models are based on low cost labour forces, either prices will rise for US consumers; there will be shortages of medicines such as paracetamol or the US government will give targeted concessions.
The automotive industry is also set for disruption. S&P Global, a consultancy, comments that, ‘We do expect the tariffs as it stands today to create a reset of the automotive value chain within North America and the world.’ It has been speculated that a tariff system which exempts some components made in Mexico or Canada may be introduced, benefiting the US and foreign companies that have large manufacturing sites across the USMCA. As with the pharma sector, it is not easy to establish new plants or increase output at existing factories in a short time period, a point emphasised by Volkswagen brand CEO, Thomas Schaefer talking about his facility in Chattanooga. ‘For now, we are watching the situation and doing back-up plans for long-term solutions’, he said, making it clear that automotive supply chains could not cope with sudden shifts in production location. BMW has said that it will absorb the additional costs rather than pass them on to US consumers whilst Porsche, in contrast, is looking at passing them on to its affluent client base. Other companies, such as Stellantis, are looking at accelerating investment plans in new production facilities in the US, although as mentioned, this will take time.
The impact on the logistics industry is also nuanced. The increased complexity of the administration of tariffs and international trade processes will help many freight forwarders improve their yields, essentially by selling higher value services leveraging their experience and know-how. At the same time many global logistics companies are benefiting from increased interest and usage of warehousing facilities in US free trade zones which allow for goods to be stored and, in some cases, manufactured without incurring tariffs. These are only imposed when they enter free circulation in the USA. However, in contrast to this, it seems inevitable that trade volumes will reduce as demand decreases which will impact shipping lines and air cargo operators in particular. In theory, domestic US trucking companies will benefit as more supply chains are localised and the manufacturing base increases, although there will be negative impact on drayage and Canadian and Mexican cross-border services.
The reality is that there is still too much uncertainty for manufacturers and other supply chain parties to adapt business strategies. Even after the ‘Liberation Day’ announcements, this situation is likely to continue for some time. Although the hit to GDP in most markets will be very small, it comes at a time when any headwind to economic growth will be felt hard. Businesses are crying out for a stable regulatory regime which allow them to plan for the future, whatever it may hold. However, it is unlikely that today will provide them with that clarity.
Author: John Manners-Bell
Source: Ti Insight
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