The European Central Bank published Working Paper No 3117 assessing the macroeconomic impact and cross-border spillovers of substantial US tariffs imposed in 2025 on imports from China and the euro area, using the ECB-Global 3.0 semi-structural multi-region model. The authors find that tariffs raise import prices and propagate through exchange rates, dominant US dollar invoicing, trade diversion and monetary policy reactions, creating a difficult trade-off between inflation control and output stabilisation. In a baseline calibration of tariffs enacted up to 26 May 2025, the model implies a 3.6% real appreciation of the USD, an 8.5% contraction in US imports, a 0.45% peak fall in US GDP, and a 0.7 percentage point rise in year-on-year US CPI inflation, associated with a 130 basis point increase in the nominal policy rate. China is projected to see a 0.75% GDP contraction with muted inflation under its managed exchange rate regime and a 40 basis point policy easing, while the euro area faces a 0.1% GDP decline and a 0.2 percentage point rise in CPI inflation, with a 30 basis point tightening driven by imported inflation from euro depreciation. Under a severe escalation scenario, the model projects an 8.0% real USD appreciation, a 26.0% collapse in US imports, a 1.8% peak US GDP contraction and a 2.0 percentage point rise in US CPI inflation, requiring a 380 basis point tightening, while China contracts by 2.8% with 115 basis points of easing and the euro area contracts by 0.85% with a 0.6 percentage point inflation increase and 115 basis points of tightening. Sensitivity analysis attributes a larger role to dominant-currency pricing than trade diversion in shaping outcomes, and shows that policy rules targeting producer prices or smoothing CPI targets can reduce the extent of tightening and output losses, at the cost of higher near-term headline inflation.
European Central Bank 2025-09-22
European Central Bank working paper models 2025 US tariff scenarios and finds sizable global GDP losses and inflation pressures
The European Central Bank's Working Paper No 3117 evaluates the macroeconomic impact of US tariffs on imports from China and the euro area using the ECB-Global 3.0 model. Tariffs increase import prices, affecting exchange rates and monetary policy, leading to a trade-off between inflation control and output stabilization. Under a severe escalation scenario, the model predicts significant USD appreciation, a sharp decline in US imports, and notable GDP contractions in the US, China, and the euro area, with varying inflation and policy rate adjustments.