Transatlantic Trade Monitor: Facts You Need Now | US Tariffs and Europe

By Fabio Balboni, Senior Economist, Eurozone, and Janet Henry, Global Chief Economist, HSBC

The word “uncertainty” does not do justice to the current global economic outlook. We knew 2025 was going to be an unpredictable year, but the pace of US policy shifts since the ‘Liberation Day’ announcements has been dramatic. The reciprocal tariff unveiling, associated financial market turmoil, the US administration’s rapid U-turn, and a doubling down on mainland China tariffs have already impacted perceptions and expectations in ways that will undoubtedly have an economic impact. Recession or no recession, the global economy will likely be a lot weaker in the coming year, and a breakdown in US-China trade could bring large scale economic losses and market disruption.  

At least slightly reassuringly, we have learned though – from the quick U-turn on most of the hefty ‘reciprocal’ tariffs within hours of their imposition on 9 April – that there is a degree of financial market convulsions, particularly in the US Treasury market, at which even the US administration reconsiders its policies. The most recent (at the time of writing) exclusion of mainland China’s smartphones, chipmaking equipment, and other consumer electronics from the reciprocal tariffs (but not the earlier 20ppt increase imposed in February and March), also taught us that the power of big business can still tip the balance even on mainland China tariffs. Even so, the exemptions might be temporary, and even with the latest rollbacks, the magnitude of tariffs now in place is much higher than previously, and with more sector tariffs looming in the near term.

Against this backdrop, uncertainty and weaker US import demand seem a given, and we also expect the higher cost of capital will weigh on investment spending. We have recently lowered our global growth forecasts to 2.3% for both 2025 and 2026, the lowest since the Global Financial Crisis (with the exception of 2020 during the pandemic). The biggest downgrades are to the US, where we see Q4/Q4 growth at 1%, and to mainland China and ASEAN 2025-26 growth. The Q1 GDP data already shows some of the impact of tariffs. In the US, consumer spending growth slowed but imports of goods surged by 50% annualised, detracting almost 5ppt from GDP (the flip side was that probably more than half went into inventories which contributed 2 ¼ ppt to GDP). In a word, frontloading.

At the time of writing, only a few other economies have published their Q1 GDP data but the ones that have are important – the two other largest economies (mainland China and eurozone) and the two bellwethers of global trade growth, Korea and Taiwan. Three of the four saw an upside surprise to consensus expectations and nowhere did exports explain so much of the outperformance as in Taiwan. Stronger consumer spending supported growth in mainland China and the eurozone, but at least some member states’ exports appeared to have benefitted from front-loading ahead of the feared tariffs: goods exports by Ireland’s “multinational dominated sectors” rose 54% y-o-y in February, led by pharma.

Hence, so far tariffs have been a drag on US GDP and a boost to exports elsewhere. At a time when many are arguing that US exceptionalism is finished, growth elsewhere is certainly welcome. But few will be fooled into believing that the global economic outlook is not deteriorating amid the enormous uncertainty, and the Q1 data may have overstated the resilience of the rest of the world to US tariff policy. Q2 will likely show a payback, with the eurozone likely to show broad stagnation.

We see five main channels through which US tariffs can impact Europe. The first is the direct impact on exports, reducing US demand for European products. The IMF estimates that a 10% tariff across the board could reduce global trade by 1%, which we think would lower eurozone export growth by around ⅔ ppts, knocking off some 0.2ppt off eurozone growth. Certain countries – and sectors – could be hit disproportionately. Among the large European economies, Germany and Italy are the most exposed to the US – with around 10% of their exports going there, worth some 3% of GDP each. Across sectors, immunological products, medicaments and autos are most exposed – with over one-third of all exports going to the US. Possible EU retaliation might support demand for goods produced inland in the near term but will likely lead to more negative consequences in the medium turn if it ends in a tit-for-tat scenario and more trade fragmentation (and a worse growth-inflation trade-offs for the central banks). Which is probably why, so far – despite the initial stated intention to do so – we have seen very limited retaliation by the EU, and rather a willingness to negotiate.

The second channel is uncertainty. Uncertainty has increased significantly since last year, particularly in terms of trade and economic policy, which we think could knock 0.3ppt off GDP growth, with the main channel being lower business investment, as well as private consumption. A third channel is trade diversion – with higher US tariffs pushing China to flock Europe with cheaper goods. This could further undermine the struggling manufacturing sector in Europe, already hit by competitiveness issues, putting more pressure on governments to intervene. Given the precedent of EU tariffs on Chinese EVs, though, a retaliation from the EU would seem likely in this case. And encouragingly, so far, both parties seem keen to cooperate, with Chinese authorities focussed on supporting domestic demand instead (which might benefit Europe’s goods exports). At the same time, with much higher tariffs imposed on China, European exporters might be able to gain some market share in the US.

The fourth impact is the currency. If the US imposes unilateral tariffs on other countries – and there is no retaliation – US demand for foreign currencies should fall and the dollar should appreciate, making other countries more competitive – as well as supporting growth and inflation there. While that is the theory, off the back of President Trump’s “liberation day”, the dollar has weakened. The euro appreciation could weigh on European exports further, but also push inflation down, easing the trade-offs facing the ECB and making it easier to cut rates in response. Fifth, by distorting markets, tariffs can introduce inefficiencies to supply chains, increasing costs and the likelihood of shortages. Over longer periods, reduced trade openness and protectionism can harm innovation, weighing on productivity. And depending on the degree of any retaliation, demand may shift to less efficient domestic alternatives in both the US and EU, creating a ‘deadweight loss’ in economic output.

So clearly, we should not take an overly optimistic steer from the Q1 GDP outperformance, as it feels a bit like looking in the rearview mirror, reflecting the world before 2 April. More recent surveys show a marked deterioration in the outlook since then, with forward-looking indicators declining in the April PMIs, the Economic Sentiment Index softening and consumer confidence taking a hit, which could push households to go back to saving more despite strong real wage gains. Meanwhile, the ongoing uncertainty regarding US tariffs and global trade is likely to continue to put a lid on firms’ investment intentions. We have recently lowered our eurozone GDP forecast by a further 0.2ppt this year and next, to 0.6% and 1.4%, respectively, and risks seems to the downside, particularly for 2026.

But not all is doom and gloom. With wage growth outstripping inflation and a resilient labour market, domestic consumption should remain well supported. Lower energy prices should provide a boost to consumers and allow firms to absorb part of the tariffs within their profit margins. Unlike after the GFC, governments are not shying away from throwing in fiscal support to offset the possible impact of tariffs on households and firms, with plenty of unused joint EU funds which can (and likely will) be redeployed towards this, to avoid putting too much pressure on individual countries’ borrowing costs. A marked change in fiscal policy in Germany, with a recently agreed EUR500bn package over 12 years to support infrastructure investment, and increased defence spending should support growth further out and help re-orient some of the spare capacity that has opened up in Europe’s struggling manufacturing sector. Furthermore, with US tariffs having clearly been disinflationary so far, they should open the door for further rate cuts by the ECB (although if uncertainty is the problem, they might not do much to reassure firms and push them to take out more debt to invest). So, while there are clear downside risks to growth, Europe’s foundations look solid, and it should avoid a recession. Instead, it is the US that might face the biggest problem.

Compliments of HSBC – a Platinum Member of the EACCNY