KfW Research: US tariff policy will impose substantial adjustment costs and reduce growth prospects

• Uncertainty is weighing on global investment activity
• The consequences for the United States will be negative as well
• Greater diversification of EU trade relations will be helpful
• Growth impetus from infrastructure package is likely to offset decline in Germany’s gross domestic product

Germany is facing substantial economic adjustment costs and a reduced long-term growth outlook as a result of the tariff policy of the US administration, at least if the conflict leads to de-globalisation and a fundamental realignment of international trade. If the US enforces the tariffs in full, the share of the United States in international trade will continue to decline.

The loss of trust in the trade policy of the US will also have long-term implications.

“It’s hard to put the uncertainty genie back into the bottle”,

said Dr Dirk Schumacher, Chief Economist of KfW.

“Countries are likely to increasingly review their dependence on economic ties with the US in critical areas – with negative consequences for the US as well.”

Nations that are interested in rules-based trade must respond to the effects and further develop the global trading system, he added.

“There is no question that fair and modern rules are necessary for a global trade and in everyone’s interest”,

explained the KfW chief economist.

“Dependable rules would also facilitate greater diversification of the EU’s trade relations, which would be helpful. Furthermore, Europe and Germany must become more attractive in global location competition, for example with a view to their financial market.”

KfW Research emphasised that rising per-capita incomes and economic openness have gone hand-in-hand for decades.

“Germany may now be facing reduced growth prospects in the long term”,

warned Schumacher. For the moment, KfW Research stands by its forecast of -0.2 per cent growth for 2025 and +0.3 per cent for 2026.

“The fiscal impetus generated by the infrastructure package adopted by the Bundestag in March will counteract losses caused by US protectionism”,

said Schumacher.

According to KfW Research, a tariff-induced increase on the price of German products in the US by 10 per cent or 20 per cent will likely lead to a 10 or 20 per cent drop in German exports to the US within around one year. Germany’s gross domestic product (GDP) would decrease by 0.15 per cent and 0.3 per cent (assuming a 20 per cent tariff) in the short term.

In the longer term, US consumers will shift even more to domestic products. However, it remains unclear whether the tariffs will remain in force under the next administration – which would undermine the goal of reshoring industrial production into the US.

According to KfW Research, uncertainty around US trade policy in the years ahead will cause enterprises to delay their investment decisions and consumers to defer their spending. This will put additional downward pressure on the already low global investment activity. In the longer term, the effects will lead to reduced global potential growth if businesses remain reluctant to invest because of the heightened uncertainty. In addition, the strong reactions in financial markets and as yet unknown vulnerabilities in the global financial system pose significant downside risks that are almost impossible to quantify, Schumacher added.

The study can be found at Focus on Economics | KfW

Where does the German economy stand today? What does the country need to become future-proof? KfW Research explores these questions in the position paper “Managing the transition, strengthening growth”, with analyses of the current situation and recommendations for action in five policy areas. The paper is available for download at Papers and Proceedings on Economics | KfW