Economists at the European Central Bank say import duties imposed by other countries can trim inflation and blunt growth across the euro area, according to a blog post published Tuesday.
The ECB team isolated episodes they term "tariff-related trade surprises" (TTS) by looking for atypical trade fluctuations tied to previous changes in US tariffs. Their findings show a two-stage reaction in the euro area: an immediate, small rise in prices consistent with higher production costs filtering through supply chains, followed by a period in which prices fall.
Measured over the medium term, the net effect is disinflationary. The paper reports that roughly one and a half years after a TTS that reduces euro-area exports to the United States by 1%, the consumer price level is about 0.1% lower. A parallel trajectory appears for industrial activity: euro-area industrial production declines over this interval before flattening out.
Sectoral differences are pronounced. Downstream industries that produce final goods - examples cited include machinery, automobiles and pharmaceuticals - typically register their largest impacts one to two years after a TTS. Scaling the results to a 1% fall in bilateral exports to the United States, output in these downstream sectors drops by roughly 0.3% on average, and producer prices fall by about 0.1% one year after the TTS.
By contrast, upstream sectors that supply intermediate inputs - chemicals are highlighted as an example - can react on a different timetable because they sit earlier in production chains and feel tariff shifts more immediately.
The ECB economists also examined how monetary policy interacts with these trade shocks. They find that the sectors most adversely affected by tariffs are also those that exhibit the strongest responses to changes in interest rates. This implies that monetary policy can play a substantial role in offsetting the disinflationary and output-reducing consequences of higher trade barriers.
Coverage in the study extends across a majority of industries: the pattern described applies to about 60% of the sectors examined, which together account for roughly half of average euro-area industrial output and goods exports to the United States.
Summarizing their assessment, the ECB team concludes that the demand-reducing impact of US tariffs on the euro area tends to exceed any supply-side inflationary pressures, producing dynamics that resemble an adverse demand shock.
Implications for markets and industry
The analysis highlights how trade-policy shifts abroad can transmit into domestic price and output dynamics, with particularly visible effects in manufacturing sectors that produce end-user goods. It also reinforces the role of interest-rate policy in dampening such shocks.