Which European Economy Will Bear the Brunt of US Tariffs?

The Impact of US Tariffs on EU Economies: Focus on Germany and Ireland

As the European Union (EU) negotiates a potential trade deal with the United States, concerns are mounting regarding the threat posed by increased tariffs, particularly for Germany and Ireland. Reports suggest that tariffs on pharmaceutical products could soar as high as 200%, raising alarm among EU member states.

Germany: The Most Vulnerable EU Economy

Germany has emerged as the EU nation most susceptible to the repercussions of US tariffs, particularly following the implementation of a 25% tariff on automobile imports and car parts in April. A report from the think tank Bruegel indicated that such tariffs could ultimately cost Germany approximately 0.4% of its GDP in the long run. This could translate into a significant economic blow, especially considering that nearly 22.7% of German exports are directed towards the US market.

Andrew Hunter, an Associate Director and Senior Economist at Moody’s Ratings, highlighted that Germany’s reliance on exports, particularly from its automotive industry, makes it particularly vulnerable. He anticipates a notable slump in GDP growth during the second and third quarters of the year. The impact is likely to extend beyond Germany, affecting smaller economies in Central and Eastern Europe that are intricately woven into Germany’s industrial supply chains.

The Broader European Landscape

While the EU’s overall economic response to US tariffs remains uncertain, the potential fallout is not expected to affect all member states equally. Bruegel’s analyses suggest that the EU economy might endure manageable macroeconomic consequences, estimating possible damages to be around 0.3% of the EU’s GDP. This stands in contrast to the projected 1.1% real GDP growth expected in the region by 2025.

Trade with the US is a critical component of the EU economy. In 2024, the US was anticipated to be the largest partner for EU exports, accounting for 20.6% of all goods exported outside the bloc. Pharmaceuticals represent a substantial part of this trade, constituting 15% of EU’s goods exports to the US, followed closely by the automotive sector.

Ireland: A High-Stakes Situation

Ireland is also at significant risk, with over half of its goods exports (53.7%) destined for the US market. The potential imposition of tariffs on pharmaceuticals could put Ireland in a particularly precarious position. Mathieu Savary, chief strategist for European Investment Strategy at BCA Research, noted that if the pharmaceutical sector were to face tariffs, Ireland would be the EU economy most adversely affected.

The pharmaceutical industry is a cornerstone of the European economy, contributing €311 billion in gross value added and sustaining approximately 2.3 million jobs in 2022. With North America accounting for nearly half of global pharmaceutical sales, the sector’s reliance on the US market is evident.

Potential Repercussions of Pharmaceutical Tariffs

Should a tariff of 25% be imposed on pharmaceutical products, smaller EU economies such as Denmark, Belgium, Slovenia, and Ireland would be particularly vulnerable. Hunter pointed out that Ireland’s exports to the US represent 18% of its GDP, with pharmaceuticals accounting for nearly 55% of its total exports. The ramifications could extend to a decrease in growth of 4% to 5% over time, with estimates suggesting that Ireland could experience a cumulative real GDP loss of around 3% by 2028.

Job Losses and Economic Uncertainty

The employment landscape also faces significant threats due to potential US tariffs. Bruegel’s analysis indicates that Italy follows Ireland as the second most exposed nation, particularly in the transport equipment and fashion sectors. The risks of job losses are substantial, with the pharmaceutical industry being highlighted as a key area of concern.

The Speculation of 200% Tariffs

Recently, US President Donald Trump hinted at the possibility of imposing a staggering 200% tariff on pharmaceutical imports. While this could serve as a powerful message to foreign pharmaceutical companies, industry analysts like Savary believe that such a drastic measure is unlikely due to the potential for escalating healthcare costs in the US, a key concern for voters. The expectation is that these negotiations may prompt foreign companies to adjust their pricing strategies and increase domestic production in the US.

Conclusion: A Complex Trade Landscape

As the EU navigates the complexities of its trade relationship with the US, the stakes are particularly high for economies like Germany and Ireland. The potential tariffs threaten not only economic stability but also job security across the continent. The outcome of these negotiations will undoubtedly shape the future of EU-US trade relations and the broader economic landscape within the EU itself.