US tariffs threaten to push Germany into recession: ifo Institute

“As Germany’s economy is already stagnating, it is possible that the US tariffs will push economic growth in Germany below zero,” said Clemens Fuest, president at ifo.

“The competitiveness of an economy is measured by its productivity, not by its foreign trade balance. Productivity will decline because the tariffs will have a negative impact on the international division of labour. If Trump wants to attract investment to the US, while at the same time reducing the trade deficit, Americans themselves will have to save more. That will require painful adjustments in the form of cutting back on consumption,” added Fuest, while calling the US President’s strategy implausible.

“The average tariff difference between the US and the EU is just 0.5 percentage points. The fact that additional tariffs of 20 per cent have nevertheless been imposed on the EU shows that the US government has arbitrarily set the level of reciprocal tariffs and included non-trade aspects such as VAT rates,” said Lisandra Flach, foreign trade expert at ifo. “Since such an interpretation of reciprocity is shared by only a few trading partners worldwide, this makes bilateral negotiations with the US government difficult.”

Fuest believes the notion of entirely replacing direct taxes with tariffs is unrealistic. However, Trump could use tariff revenues to reduce direct taxes, though this would have a highly regressive impact. “If Trump also wants to lower the budget deficit, as he claims, tax cuts won’t happen,” ifo said in a press release.

ALCHEMPro News Desk (SG)