The direct impact of potential United States trade tariffs on Luxembourg’s economy would be relatively small, with GDP exposure from direct goods exports to the US accounting for only 0.13%, according to Ruben Dewitte, an economist at ING and visiting professor at Ghent University. He told Paperjam that Luxembourg exported goods worth €515m to the US in 2023, representing 15.8% of its total extra-EU exports. However, Luxembourg’s economy relies primarily on services, particularly financial services, making goods trade with the US less significant in terms of overall GDP.
Dewitte explained that Luxembourg’s GDP exposure could increase when considering its role in supplying intermediate goods or services to other EU nations that is then exported to the US. For instance, German car manufacturers exporting to the US rely on financial services from Luxembourg. Should US tariffs be imposed, this aspect of Luxembourg’s GDP would also be affected. Dewitte estimated that including indirect exposure, the total impact of US tariffs on Luxembourg’s GDP would be approximately 0.98%. While this remained relatively low compared to the EU’s overall exposure of 1.93%, he warned that the indirect effects of reduced consumption and investment in European economies could amplify the consequences.
Potential impact on the EU
Dewitte assessed that if US president Donald Trump’s administration were to implement new tariffs against the EU, this could reduce the bloc’s GDP by 0.33% in the short term. He stressed that although this figure might seem marginal, it would be a significant setback for economies already struggling with stagnation. Over time, he warned, the negative impact could increase further.
He estimated that a 25% tariff imposed by the US on European goods could lead to a 19% decline in EU exports to the US. With the GDP contained in these exports estimated at 1.93% of total EU GDP, this would result in a short-term GDP contraction of 0.33%. Additional indirect effects, such as declining investor confidence and financial market instability, could further exacerbate the economic downturn.
In the long term, Dewitte projected that the direct impact on EU GDP could rise to 0.87% under a 25% tariff scenario. Over time, American consumers and producers might identify substitute suppliers, reducing reliance on European imports. The economic consequences could escalate due to multiplier effects, including production losses leading to job cuts, weaker consumer demand, and reduced investment. These factors would reinforce the overall decline in GDP, potentially amplifying the negative impact of US tariffs on Europe’s economy.
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US-EU trade volume
The US remained the EU’s most significant trade partner for goods in 2023, with exports amounting to €504bn, equivalent to 20% of all extra-EU exports. Germany alone accounted for €158bn, or 31% of this total, making it the most exposed European economy to the US market. Despite this, German trade with the US represented only 22% of its total extra-EU trade, a proportion similar to that of Italy and the EU average.
Other major economies had lower relative exposure to the US market. France’s exports to the US comprised 16.3% of its extra-EU trade, followed by the Netherlands at 15.5% and Spain at 13.1%. In contrast, Ireland had the highest exposure, with 46% of its extra-EU trade directed to the US. Dewitte attributed this to the favourable tax treatment of US multinationals and the presence of American pharmaceutical manufacturing in Ireland. Besides pharmaceuticals, EU-US trade mainly consisted of cars, machinery and equipment, and chemicals.
Varied exposure
Dewitte further analysed GDP exposure across the EU, highlighting the differences among member states. For Luxembourg’s neighbour Belgium, indirect exports to the US through other EU economies increased its GDP exposure from 0.9% to 1.54%. Compared to the EU’s overall exposure of 1.9%, France and Spain were less exposed, at 1.1% of GDP. Germany and Italy, on the other hand, faced more considerable risks, with exposures of 2.1% and 2%, respectively.
Germany and Italy’s vulnerability stemmed largely from direct exposure, with both countries’ direct trade with the US contributing 1.7% of their GDP. Their exports contained a relatively high domestic value-added content, intensifying the economic repercussions of potential US tariffs. Ireland stood out as the most exposed economy, with US-related exports accounting for 9.7% of its GDP.
However, Dewitte noted that the ultimate economic impact would depend on the duration of the tariffs, how well EU exporters can adapt, any potential changes--whether increases or decreases--and the extent to which global trade dynamics evolve in response, making these estimates preliminary and subject to change.