Both EU and US economies would contract if Donald Trump goes through with 25% tariffs on European goods he has proposed.
The Kiel Institute for the World Economy, which made the calculations, said there would be a sharper effect if Europe retaliates with its own tariffs.
Goods made in the European Union will be hit with 25% tariffs, President Trump said last night in the first cabinet meeting of his new administration.
"We have made a decision and we’ll be announcing it very soon. It’ll be 25%,” he said, threatening that that levies will be applied “generally”, mentioning "cars and all other things."
The European economy would shrink by an average of 0.4% in real GDP terms within the first year, simulations run by the Germany-based Kiel Institute showed.
This is a significant impact for a short-run scenario, the institute said in a note on Thursday.
"The US itself would not be spared, experiencing a contraction of 0.17%," it added, with potential EU retaliation of a similar 25% tariff leading to the economic damage to the US roughly doubling, with another 0.14 percentage points added.
Prices in the US could increase by up to 1.5% due to higher costs for imported final goods and components, "making domestic production more expensive and reducing overall competitiveness", the institute said.
European exports to the US would decline 15-17% in the first year, with Germany’s sales to the US estimated to fall 20% and falling 1.5% overall.
"These tariffs would not only strain transatlantic economic relations but also drive up costs for US consumers and manufacturers," says Julian Hinz, research director for trade policy at the institute.
"The significant increase in production costs due to higher-priced imported inputs could undermine US competitiveness and fuel inflation, ultimately harming American businesses and consumers alike."