The European Central Bank published an ECB Working Paper analysing how bilateral trade wars propagate to third countries, using the 2025 escalation in US-China tariffs to quantify spillovers to the euro area and to assess outcomes if protectionism expands to euro-area goods. The paper, which does not represent the ECB’s views, models trade in final and intermediate goods under incomplete asset markets and asymmetric monetary regimes, and also derives welfare-maximising retaliatory tariffs for the euro area. In the baseline US-China trade war, the model finds large and asymmetric welfare losses for the protagonists, with the United States’ welfare falling by around 1.5% of steady-state consumption on impact and China’s by about 1.2%, while the euro area benefits temporarily from trade diversion and is only marginally affected in the short run. The calibration references a rise in average US tariffs on Chinese goods by about 36.8 percentage points (from 20.7% to 57.6%) and in Chinese tariffs on US goods by about 11.4 percentage points (from 21.2% to 32.6%), and associates the shock with a temporary increase in quarterly CPI inflation of about 0.5 percentage points in the United States and 0.2 percentage points in the euro area, alongside persistent disinflation in China linked to its exchange-rate stabilisation objective. Once tariffs extend to euro-area goods, third-country welfare flips into losses and the Chinese downturn deepens; welfare-maximising euro area retaliation delivers only modest domestic improvements and is achieved through large tariff hikes, at the cost of materially larger welfare losses for the United States and China.
European Central Bank 2026-04-01
European Central Bank working paper quantifies 2025 US-China tariff spillovers and finds euro area gains reverse when tariffs broaden
The European Central Bank published a Working Paper analysing how the 2025 escalation in US‑China tariffs affects the euro area and how outcomes change if protectionism extends to euro-area goods, using a trade model with incomplete asset markets and asymmetric monetary regimes. It finds large, asymmetric welfare losses for the US and China, with the euro area initially benefiting from trade diversion and only marginally affected, but once tariffs hit euro-area goods, euro-area welfare turns negative, the Chinese downturn deepens, and welfare‑maximising euro-area retaliation yields only modest domestic gains at the cost of materially larger US and Chinese welfare losses.