Trump's tariffs and the possible consequences

Future US President Donald Trump, who will take office for the second time on 20 January 2025, has already announced the introduction of heavy tariffs on imports. The aim is to protect US domestic production, but at the same time, these measures worry global markets, as they could destabilise international trade. Edoardo Beretta, adjunct professor of Macroeconomics at the Faculty of Economics at Università della Svizzera italiana (USI), tackled the issues on Alphaville, a radio programme on Rete Due (RSI).

In response to Trump's intentions, the European Central Bank (ECB) president, Christine Lagarde, proposed a deal to prevent a trade war with the US. She suggested that Europe should increase its imports from the US in exchange for the US waiving tariffs. The key question now is whether this proposal is a wise move. Analysing the situation, Edoardo Beretta, adjunct professor of Macroeconomics at USI, says, "one should anticipate that the situation regarding international trade may change in the short term. In a nutshell, the measures announced by Trump will likely impact Swiss exports, especially since the United States was Switzerland's main trading partner in 2023. The European Union (EU) would be even more affected, given that 22% of its exports are directed towards the US. If some of these measures are actually implemented, Europe will undoubtedly feel the effects".

Beretta analysed Lagarde's suggested proposal: "I completely support the need for dialogue, as it is essential for creating stable conditions that foster economic growth and sustainable trade relations. However, increasing imports from the US could lead to a reduction in local (European) production or result in shifting some European imports away from other countries. In other words, it is important to ensure that this manoeuvre does not lead to an increase in unemployment across Europe, as this could slow down economic growth. We must also be cautious about the potential introduction of tariffs on various European products (which still need to be defined). Furthermore, we should avoid compromising local production or undermining our strong and consistent trade relations with other nations".

If the EU followed Christine Lagarde's advice by increasing US imports, this would be a big win for Trump, as he would not only be able to impose tariffs but also increase exports.

The situation largely depends on how the trading partners choose to operate. If the EU were to take this step, it's likely that the Trump administration would use it as an argument to claim success. However, I want to emphasise that the real issue for the United States isn't primarily about foreign exports. The US faces a serious trade deficit problem, which contributes to the nation's foreign debt. Therefore, Trump's measures aim to reduce the systematic imports that continue to increase this debt," Professor Beretta continues.

Another issue involves how Europe's political leaders will respond to this news and how they can shape the path forward from 2025 onwards. "I believe that these reactions are still fragmented, and there is a lack of a truly coordinated European policy. The debate surrounding the re-election of Donald Trump is rekindling support for a return to protectionism at the European level. As a result, we are seeing discussions about scaling back globalisation, which has been poorly managed in recent years. This discussion may lead to a partial return to protectionism in the future". But what would this entail? "Certainly, protectionism has disadvantages, but we must remember that the United States is a large country, in terms of size and volume, which is decisive for trade relations. They, therefore, have the possibility to direct what is called the "terms of trade" more to their advantage, i.e. to have a win-win situation even when a tariff is introduced. Of course, it will be up to the US trade partners not to be spectators of US trade policy, but to have a clear and cohesive industrial policy themselves, to avoid being at the mercy of the decisions of the most important trade partner'"

In conclusion, by the end of January 2025, what will the relationship be like for European partners concerning US tariffs? "I believe that President Trump will approach his agenda assertively, as he has done in the past, so I expect the topic to be addressed right away. However, I don't think that indiscriminate measures will be imposed on all European products, despite the concerns raised during the election campaign. Instead, it will be important to identify which specific products will be affected and whether there will be volume limits in place. In the meantime, European countries should focus on promoting domestic growth, which may not necessarily rely on key trading partners, especially those facing structural foreign debt issues. Therefore, we need to concentrate on improving GDP, fostering innovation, enhancing growth prospects, and increasing overall competitiveness," Professor Beretta concludes.

To listen to the full interview on the Rete Due (RSI) radio programme Alphaville, click here (Italian only).