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Europe’s largest economy would likely suffer another two years of recession if US President Donald Trump were to impose the pending tariffs on Mexico and Canada, German economists found – before retaliation is factored in.
For now, the US has suspended tariffs on goods from their neighbours Mexico and Canada – but if they were to follow through with their economic threat, the effects for European countries could be devastating – even if the EU itself avoided tariffs.
Economists from German research institute IW Köln found that Germany’s price-adjusted gross domestic product could shrink by 0.1% this year, and by 0.4% in 2026. The EU as a whole could suffer a similar decline this year, and another 0.3% reduction in 2026.
The study was published on Wednesday, with its forecast considering the impact of the measures announced – and subsequently suspended – by Trump in his first weeks in office.
This means the fallout from tariffs would likely eat up any meagre projected growth in Germany: the federal government projects a 0.3% improvement this year, while the association of industry-related service providers predicts a 0.1% decline, and the umbrella association of Germany’s Chambers of Industry and Commerce expects a 0.5% decline.
€25 billion of damage for Germany – before retaliation
€12.5 billion of Germany’s gross value added currently depends on exports from Mexico, Canada and China to the US. This is mainly due to German electrical, metal and chemical companies having their intermediate goods processed in these countries and then sold to the US – Volkswagen being one prominent example.
The impact on the 2,100 German companies that have local branches in Mexico would be more direct, for obvious reasons.
These costs could accumulate to €25 billion until the end of 2026, the study projects, adding that “should the affected countries retaliate, the damage would be even more severe.”
US-EU LNG bargaining chip
Pia Hüttl, researcher at the macroeconomics department at DIW Berlin, says that while the direct impact on German consumer price inflation is “likely to remain limited”, energy prices will become more volatile as a result.
This is a major factor in the equation, given that Trump repeatedly threatened to impose tariffs on goods from European countries should they fail to buy more energy sources like liquified natural gas (LNG) from the US.
The already frosty projection by IW Köln does not include this likely scenario.
China recently put 15% retaliatory tariffs on coal and LNG imports after Washington raised levies on Chinese goods by 10%. This might play out in Europe’s favour, as the continent will likely remain the most attractive market for US exporters, according to commodity analyst Alex Froley from ICIS.
Froley says that in the event of US tariffs on the EU, Europeans are unlikely to follow China’s example of counter tariffs on energy. US imports account for nearly half of the EU’s LNG supplies.
“Governments might view it as counter-productive to add further costs when energy prices are already high”, he said.
But even then, there are more factors in the equation. LNG shipping costs have reached a five year low, global demand levels are projected to peak this year, and how Trump responds to these dynamics remains an open question.
Hüttl warns that the US president could focus on the LNG that the EU is already contractually obliged to purchase – turning these obligations into “a means of leverage” for the US.
[DC/OM]
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