Increased tariffs on the EU would undo US-China trade relief

On May 23rd, President Donald Trump threatened to impose a 50% tariff on imports from the Eurozone starting on June 1 and floated a 25% levy on smartphone imports. After speaking with Ursula von der Leyen, President of the European Commission, he later backed away from his threat of 50% tariffs, restoring a July 9 deadline to allow for talks between the US and the EU.

In this report, we explore the potential consequences if the proposed tariffs were to be implemented:

• If the threatened tariffs on imports from the European Union and smartphones were to be implemented, it would reduce US’ annual GDP growth this year, raise inflation, and increase the unemployment rate.
• The threatened tariffs would undo some of the relief from the US-China trade truce, nudging the effective tariff rate nearer to our recession threshold of 25%-28%.
• The proposed tariffs on the EU highlight a key forecast risk, whereby tariffs remain an ongoing tool to be wielded by the Trump administration whenever negotiations hit a snag. Repeated tariff threats and rollbacks will keep policy uncertainty elevated.