FRANKFURT, Feb 10 - A study by economists at the European Central Bank, published in a blog post on Tuesday, concludes that U.S. tariffs introduced last year are exerting a downward pull on euro zone growth and inflation. While trade barriers can influence prices through several channels, the paper finds that the reduction in demand stemming from tariffs outweighs any inflationary effects from supply-side disruptions.
The blog post - which the authors note does not necessarily reflect the official stance of the ECB - models the impact of tariff-related trade shocks on consumer prices and output. It estimates that, at the nadir roughly one and a half years after a tariff shock that reduces euro zone exports to the United States by 1%, the consumer price level would be about 0.1% lower.
Trade flows have been erratic since the tariffs were rolled out, the economists say, as firms frontloaded imports to avoid higher duties and later drew down inventories. The baseline tariff rate for EU goods entering the United States is cited as 15% in the analysis. Against that backdrop, the most recent three-month period for which data were available showed euro zone exports to the U.S. were down about 6.5% compared with the same period a year earlier.
The timing of the price effect and the overall magnitude are important because euro zone inflation has already slipped below the ECB's target. Inflation was 1.7% in January, under the 2% goal, and some policymakers are concerned it could decline further.
However, the study highlights a potential offset: sectors that are most affected by the tariff shock - including machinery, autos and chemicals - also appear to be the most sensitive to changes in borrowing costs. The economists report that output in these sectors can fall sharply following a tariff-related demand shock but tends to expand strongly when interest rates are lowered.
Quantitatively, that responsiveness appears widespread. The pattern of high tariff sensitivity and strong reactions to interest-rate moves holds for about 60% of the sectors examined in the study. Those sectors account for roughly 50% of average euro zone industrial output and about half of total goods exports to the United States, according to the blog.
The authors therefore suggest that a reduction in borrowing costs could, in principle, offset some of the downward pressure on consumer prices created by tariffs, because the sectors suffering the largest trade-related demand losses are also the ones that expand the most when financing becomes cheaper.
The blog post underscores the complexity facing policymakers: trade-policy shocks can simultaneously suppress demand and alter supply conditions, and their net effect on inflation depends on which channel dominates. In the case analyzed by the ECB economists, demand effects appear to dominate - but the sensitivity of the most affected sectors to interest rates offers a potential policy response.
Key points
- U.S. tariffs imposed last year have reduced euro zone exports to the U.S. and are estimated to lower the consumer price level by about 0.1% at their nadir after a 1% export decline.
- Sectors most impacted - machinery, autos and chemicals - are also highly responsive to interest-rate changes, making rate cuts a potential offset to tariff-induced price weakness.
- About 60% of sectors studied - representing roughly 50% of industrial output and 50% of goods exports to the U.S. - display this pattern of tariff sensitivity combined with strong responses to lower borrowing costs.
Risks and uncertainties
- Trade data volatility, driven by frontloading and inventory drawdowns, complicates measurement of the tariffs' lasting effect on exports and prices - affecting trade-dependent sectors and goods exporters.
- Inflation is already below the ECB's 2% target at 1.7% in January, and policymakers are worried prices could fall further, creating downside risks for inflation-sensitive sectors and monetary policy decisions.
- The blog post does not necessarily reflect the ECB's official view, leaving uncertainty about how the central bank will weigh these findings in its policy deliberations, which affects expectations across markets.