A new study released by Gergő Motyovszki, economist at the European Commission’s Directorate-General for Economic and Financial Affairs, shows that the tariffs imposed globally by the US are likely to slow the US economy, reduce real incomes and disrupt global trade patterns, with noticeable effects on the European Union as well.
A major shift toward protectionism
According to the report, the US under the second Trump administration has turned strongly toward protectionist policies. The sharp increase in tariffs is intended to make imported goods more expensive, so that consumers and companies shift toward American-made products. At the same time, the US government expects higher tariff revenues to strengthen the federal budget.
However, Motyovszki stresses that “the economic adjustments triggered by large tariff hikes rarely unfold in a simple or cost-free way”, pointing out that several forces counteract these intended benefits.
Why higher tariffs can hurt the US economy
While tariffs do redirect some demand away from foreign goods, the report highlights several problems that arise inside the US economy:
• Imported materials become more expensive, raising production costs for manufacturers.
• Workers' purchasing power weakens as everyday goods rise in price.
• Increased domestic demand pushes up local prices and the overall cost of living.
• US exporters lose competitiveness as higher costs make their products more expensive abroad.
Taken together, these effects slow down economic activity and lead to a decline in US GDP. “[…] While tariffs can generate additional fiscal space for the US government, most of their burden falls on domestic firms and households, who face lower real incomes through higher consumer prices or reduced profit margins, at least until the extra tariff revenues are handed back to them through tax cuts or transfers,” stated Motyovszki.
How the EU is affected
The report finds that the EU is also influenced by US tariff hikes. EU GDP declines moderately, largely because European exporters sell less to the United States. On the other hand, EU companies gain some extra ground in third markets where US exporters lose competitiveness due to higher domestic costs.
Still, the study highlights that the EU experiences a decrease in its purchasing power, as international price movements become less favourable. If the US targets several countries at once, goods displaced from the US market flow into other regions at cheaper prices, adding short-term pressure on European producers.
How expectations shape the outcome
Expectations also play a significant role. If companies assume the tariffs will remain in place permanently, the US enjoys bigger short-term gains from improved terms-of-trade - but the global economy suffers more as trade volumes fall. If companies adjust prices slowly in US dollars, international trade contracts more sharply.
These expectation-driven dynamics can significantly influence how painful the adjustment period becomes for both the US and the rest of the world.