Weekly Update - The start of a trade war

The United States acted on customs duties. While Donald Trump had been clear during his campaign about his desire for a protectionist policy, he surprised by the speed, scale and extent of the tariff increases. China, Canada and Mexico, as well as steel and aluminium have already been targeted and there are strong threats of an extension to European goods as early as April. 

Protectionism: if the objectives are multiple, its effectiveness seems limited. The U.S. government has announced different reasons to justify a protectionist trade policy: (i) reindustrialize its economy, (ii) reduce its dependence on China, (iii) reduce the federal budget deficit, and (iv) rebalance certain global imbalances. However, even a significant increase in tariffs is expected to have only a limited effect on its objectives.
Indeed, as far as the reindustrialization objectives are concerned, one of the first consequences of the increase in customs duties will be the increase in production costs for American companies integrated into the global value chains (automotive or aviation for example).
Moreover, examples of policies of reindustrialization through import substitution without stimulating exports (Latin American economies between the 1970s and 1990s) have not been successful.
As far as the improvement of the public accounts is concerned, the substitution of income and corporate taxation seems unrealistic given the respective amounts of these two categories of revenue.

A mapping of trade between the United States and Europe. The US trade deficit has deteriorated significantly since Covid. It is high in particular vis-à-vis China, the European Union, ASEAN, the developed economies of Asia and Mexico. It mainly concerns consumer goods, capital goods and automobiles. The United States, on the other hand, has a trade surplus in services.
The euro area, as a whole, has a trade surplus. It appears to be in deficit only vis-à-vis China. France has a moderate deficit, mainly due to energy. France's exposure to US tariff increases is limited at the aggregate level but could weaken sectors such as aviation, pharmaceuticals and agriculture.

Risks to the upside on inflation and to the downside on growth. The increase in customs duties already in place as well as the threats of extension to all European goods pose a risk to the world's major economies. In its latest note, the OECD assesses the impact of an increase in US tariffs on all its imports, with equivalent retaliatory measures from trading partner countries (see graphs showing the impact of a 10-point increase in customs duties).
As for the US economy, the increase in customs duties would result in more inflation and less growth, playing a role equivalent to an increase in taxes on consumption.
For the rest of the world, Canada and Mexico would suffer a significant shock to their activity, given the importance for their economies of trade with the United States, with a real risk of recession in 2025.
For the euro area, these measures should also have a negative effect on activity, but much more limited given the lesser weight of US trade for Europe.
For more information on the subject, you can refer tothe Strategy Focus.

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