6 February 2025

Summary

President Trump’s best-selling book from 1987 could be the handbook for his transactional trade policy in his second term, as seen in the temporary reprieve from tariffs granted to Mexico and Canada. However, China was not so lucky, despite indicating a willingness to negotiate. The 10% increase in tariffs went into effect on 4 February and has already sparked retaliation. If fully implemented, tariffs could cost China -0.3pp of GDP growth in 2026, albeit fiscal stimulus will compensate for the impact. Mexico and Canada could face recession, with a -1.5-2.0pp GDP hit in 2025-26. Though the impact could be mitigated by fiscal easing (especially in Canada), US inflation would be pushed above 3%, shutting the door to further Fed rate cuts this year. The automotive, energy and agrifood sectors are in the crosshairs. Finding new clients and suppliers is hardly straightforward, and rerouting will also prove difficult as US trade agreements will require the origin country to “improve” or “transform” the product to avoid tariffs. Ultimately, the final impact will depend on how much companies can stockpile, and how much of a hit they can take on their margins.
Similar tariffs on Europe could cut almost -1.0pp off GDP growth in both the Eurozone and the US over 2025-26, with pharmaceuticals, machinery & equipment and auto suffering the most in Europe. Trump’s focus on reducing the trade deficit with Europe will make negotiations tougher, though we do expect some agreements, setting the stage for a contained trade war with capital markets already tentatively pricing in a trade deal. Lower European tariffs on US cars and agricultural goods are likely, alongside commitments to increased European purchases of US defense and energy exports. But these concessions would still be a net-negative for the Eurozone, and the prolonged uncertainty will affect economic confidence lowering GDP growth by -0.2pp to around 1% in 2025. Germany would be on the frontlines in a full trade war scenario, facing the risk of a third consecutive year of recession.
If a 10% universal US import tariff is implemented, it could threaten USD80bn of emerging market exports, and partners with large trade deficits (Vietnam, Taiwan, India, Thailand, Malaysia) could have a target on their backs. Some are being proactive by cutting import duties early (e.g. India) and some could benefit from rerouting. But the ripple effects of tariffs present a perfect storm for countries with high exposure to USD-denominated debt (Angola, Cameroon, Egypt, Colombia, Peru, Chile, Mexico). Policy makers are likely to address the tariff shocks with a coordinated mix of fiscal measures, monetary adjustments and FX interventions, but there will be no easy way to neutralize the compounded impact.
Ludovic Subran
Allianz SE
Ana Boata
Allianz Trade
Ano Kuhanathan
Allianz Trade
Bjoern Griesbach
Allianz SE
Jasmin Gröschl
Allianz SE

Lluis Dalmau

Allianz Trade

Jordi Basco-Carrera
Allianz SE

Guillaume Dejean

Allianz Trade

Maxime Darmet
Allianz Trade

Yao Lu

Allianz Trade

Maria Latorre
Allianz Trade
Luca Moneta
Allianz Trade

Sivagaminathan Sivasubramanian

Allianz Trade

Patricia Pelayo-Romero
Allianz SE
Weekly on Allianz markets, macro, sector & insurance research by Ludovic Subran

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