What impact would tariffs have on the Euro area and the Nordics?

By Tuuli Koivu, Jan von Gerich, Juho Kostiainen, Mitro Hartikainen, Helge J. Pedersen, Torbjörn Isaksson and Kjetil Olsen

Our baseline scenario set forth in the latest Nordea Economic Outlook from January 2025 is that Trump will implement tariffs on European imports, but we expect them to be rather low and the implementation process to be transparent, reducing the currently high level of uncertainty. However, Trump’s plans on tariffs have been changing almost every day and there is still a lot of uncertainty around the final scale and coverage of the tariffs.

What should we expect from Trump?

We see at least three different motivations for Trump to impost tariffs on European countries: 

1. It is well known that for Trump, the large US goods trade deficit is a sufficient argument to impose tariffs, especially on those countries that run bilateral trade surpluses with the US. 

The US has the largest goods trade deficit with China, the EU, Mexico and Vietnam and from this perspective it would be a surprise if the EU was not facing additional tariffs imposed by Trump. 

2. Trump has recently emphasised the importance of tariffs as a way to increase federal budget revenues.

A scenario that has caught a lot of attention recently is that Trump could deliver a permanent decline in the corporate income tax rate to 15% (he lowered it to 21% in his first term) by imposing tariffs as a counterbalancing fact to the budgetary legislation. 

3. Trump could also use tariffs as a negotiation tool to achieve geopolitical goals.

In his communication Trump often combines the low defence budgets in a number of EU countries with tariffs and he has even threatened Denmark with higher tariffs if they cannot come to a common understanding on Greenland (in practice, it is not possible for Trump to target Danish exports separately from the EU). 

In sum, no matter which type of motivation that dominates Trump’s tariff policy, the EU will likely be one of his key targets on this front. 

Impact on the Euro area and the Nordics

In our latest analysis, we explored the impact of Trump’s potential tariffs on the Euro-area and Nordic economies as well as monetary policy rates. Our main conclusions are:

• The size of the negative impact will depend not only on the scale of the tariffs but also on the level of uncertainty that Trump’s policies may cause in the region and globally.
   
• In our baseline forecast, we expect the US to implement a low, broad tariff on European imports and the level of uncertainty to decline in the coming months. In this type of scenario, the direct impact on GDP growth in the Euro area and the Nordics should be small.
   
• However, there is a risk of a significantly more severe trade war, which could push at least the Euro-area economies that are more exposed to US exports into a recession. The downturn could be even more severe if tariffs are linked to sensitive geopolitical topics and the EU takes aggressive countermeasures. In this case, the ECB would keep cutting the deposit rate all the way to 1%.
   
• Out of the Nordics, the Norwegian economy is less exposed to the US market than the others. In the other Nordic countries, the direct tariff impact would be sizable, but still manageable. However, the total negative impact would to a large extent depend on how much general uncertainty would increase and thus what kind of a negative confidence shock would take place. In the worst case, even negative quarterly growth rates are possible.
   
• In the financial markets, both the SEK and NOK could suffer significant declines in an uncertain environment where high tariffs and trade war worries are prevailing.

Overall, the direct effect of tariffs on the Nordics is estimated to be small, but the small open economies are vulnerable to a higher level of uncertainty and the indirect effects can dominate the impact.

See the full analysis here.