This is a guest post from Simon Schropp (BRG and George Washington University) and Kornel Mahlstein (Sidley Austin LLP)
Eight weeks into the Trump Administration it appears that the “Trump tariffs” on America’s closest allies are not mere posture. Treasury Secretary Scott Bessent announced on March 18 that the Trump Administration plans to slap extra tariffs on goods imported from about 15 percent of nations with which the United States has run a persistent trade deficit—a group with the catchy moniker “Dirty 15”. These discriminatory tariffs, billed as “Reciprocal tariffs” by the White House, are expected to come into force on April 2. While the Trump Administration has not officially released a list of the Dirty 15 yet, political insiders have indicated that it will most certainly include the European Union (EU), next to Australia, Brazil, Canada, China, India, Japan, South Korea, Mexico, Russia, and Vietnam.
The EU appears inclined to retaliate against the looming imposition of the Trump tariffs against its exports, most likely by invoking its new Anti Coercion Instrument.[1] Practical questions for the EU Commission will then include the following: (i) what is the most appropriate (set of) countermeasure(s)?; (ii) how should countermeasure(s) be calibrated?; and, (iii) which U.S. imports should be targeted?
If past is prologue, the EU will engage in “tit-for-tat” punishment, i.e., reciprocate with additional tariffs on U.S. goods imports. One does not have to be an economist to comprehend that blanket retaliation covering all imported U.S. products and sectors is not productive: There are U.S. imports that the EU desperately needs, and an imposition of additional tariffs may cause more economic self-harm than it causes pain to the United States. It would thus behoove the EU to devise retaliatory action such that it inflicts the highest pain on the U.S. economy, while at the same time causing the least self-harm to EU welfare.
We apply a sector-by-sector partial equilibrium model co-developed by the authors.[2] The model covers roughly 5,300 sectors (product groups), categorized along the six-digit level of the Harmonized System (HS). It allows us to simulate, among others, welfare gains and losses experienced by both the U.S. and the EU economies resulting from retaliatory EU tariffs on U.S. imports. Lacking further detail, we assume that the EU would impose an even 25 percent tariff on U.S. products in all selected sectors.
Three tables below present a sample of our results. Table 1 contains a list of the 25 sectors in which retaliatory EU tariffs would inflict the highest welfare losses on the United States. Table 2 provides the top-25 ranking of sectors in which EU tariff retaliation would generate the highest welfare gains for the EU through improvement of the EU’s terms of trade (TOT).[3] And, combining the results of the first two tables, Table 3 presents the top-25 sectors in which the balance of pain inflicted on the U.S. economy and self-harm to the EU is particularly favorable (calculated here as the maximum distance between EU gains and U.S. losses).
Table 1: Sectors in which EU tariff retaliation generates highest welfare losses to U.S
Sources: UN WITS (latest available bilateral trade-flow data).
Notes: EU tariffs of 25% are assumed; welfare gains/losses are measured as the sum of terms-of-trade gains/losses, efficiency losses from inefficiently low import/export levels, and losses from inefficient resource allocation; for more information on model methodology, see Latipov et al. (2022; 2023).
Table 2: Sectors in which EU tariff retaliation generates the highest welfare gains to EU
Sources: UN WITS (latest available bilateral trade-flow data).
Notes: See notes accompanying Table 1.
Table 3: Sectors in which the balance of harm to the U.S. economy and self-harm to the EU economy is most favorable
Sources: UN WITS (latest available bilateral trade-flow data).
Notes: see accompanying notes to Table 1 and 2; “maximum distance” is calculated as the sum of welfare gains to the EU and welfare losses to the United States (in absolute terms).
While our cut-off point of 25 product groups is arbitrary, the tables illustrate the considerable potential that smart retaliation in only a few selected industries could unleash: For example, Table 1 shows that with retaliation in only 25 selected sectors (that, together, are responsible for roughly 46 percent of all U.S. imports), the EU could cause 54 percent of all achievable U.S. welfare losses, while at the same time securing 62 percent of achievable terms-of-trade gains.
We appreciate that many factors other than Union-wide welfare—such as strategic, political, environmental, or public-health considerations—play into the Commission’s decision whether and how to retaliate in a particular sector or the other. Our objective here was simply to highlight one economic perspective on tariff retaliation.
The analysis presented above can easily be extended. For example, one may be interested in lists featuring the bottom-50 industries, i.e., those sectors in which the EU should avoid any retaliation, simply because higher EU retaliation would cause no, or negligible, economic harm to the United States, and/or distressing levels of economic self-harm to the EU. One could also imagine that the EU would also want to take into consideration tariff pass-through rates (see column (2)) so as to avoid situations in which EU consumers bear an outsized burden of the tariff incidence that retaliation would entail. Moreover, instead of focusing on welfare measured in absolute dollar/euro values, one may equally consider optimizing percentage changes in welfare (see columns (7) and (9)). Next, we assumed that the EU levies a 25 percent import tariff on every sector selected for retaliation. An interesting modeling scenario is one in which the EU imposes “optimal” tariffs, i.e., tariff levels that maximize the EU’s terms-of-trade gains, individually for every selected sector. Lastly, the same sector-by-sector analysis performed here from the perspective of the EU can now also be executed for any other country on the “Dirty 15” list.
[1] The ACI gives the EU a wide range of possible countermeasures against countries engaging in economic coercion, the imposition of additional tariffs being only one of the options.
[2] See Latipov, O.; C. Lau; K. Mahlstein; S. Schropp (2022); “The economic effects of potential EU tariff sanctions on Russia – a sectoral approach”, Intereconomics, Vol. 57(5) pp., 294-305; and Latipov, O.; C. Lau; K. Mahlstein; S. Schropp (2023); “Quantifying the Impact of the Latest US Tariff Sanctions on Russia: A Sectoral Analysis”, Journal of World Trade Vol. 57(1): 55–124.
[3] In some sectors, the EU as importer has a degree of market power vis-à-vis the United States, forcing U.S. exporters to absorb a share of the EU’s tariff incidence by lowering export prices. This improves the EU’s TOT (i.e., the relative price at which the two economies exchange goods and services), and it does so to the same degree that it worsens the U.S. TOT – constituting a pure net wealth transfer from the United States to the EU.
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