Details
- Identification
- Discussion Paper 234
- Publication date
- 28 November 2025
- Authors
- Gergő Motyovszki | Directorate-General for Economic and Financial Affairs
Description
This paper assesses the macroeconomic consequences of US tariff hikes on the EU and US as well as on global trade flows, based on quantitative simulations by the European Commission's multi-region New Keynesian DSGE model, QUEST.
Highlights:
- Rather than aiding domestic production, tariff hikes weaken the US economy: while tariffs shift demand from imports towards US-produced goods, they also act as an adverse supply shock.
- Although tariff revenues generate additional fiscal space for the US government, only around a quarter of the burden falls on foreigners in the form of a US terms-of-trade gain. US trade deficits are reduced only temporarily.
- The effects on EU GDP are moderately negative, driven mainly by weaker exports to the US. At the same time European exporters gain market share in third countries at the expense of less competitive American firms.
- US tariffs on non-EU countries lead to trade diversion, slightly deepening the short-term economic losses in Europe, but reversing later on.
- A general tit-for-tat retaliation would deepen the negative impacts in both the US and the EU. Beyond the direct effects of tariffs, rising uncertainty and a loss of investor confidence in the US economy further aggravates the adverse economic consequences by tightening financing conditions.
Information and identifiers
Discussion Paper 234. November 2025. Brussels. PDF. 116pp. Tab. Graph. Bibliogr. Free.
KC-01-25-065-EN-N (online)
ISBN 978-92-68-31838-6 (online)
ISSN 2443-8022 (online)
doi:10.2765/6056667 (online)
JEL classification: E62, F13, F41, F42, F47.
Disclaimer
European Economy Discussion Papers are written by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs, or by experts working in association with them, to inform discussion on economic policy and to stimulate debate. The views expressed in this document are solely those of the author(s) and do not necessarily represent the official views of the European Commission.
