Tariffs impede business dynamism and long-term growth in Europe
Rising tariffs are placing European companies under strain, threatening business dynamism and long-term economic growth. This could lead to slower innovation and reduced productivity across the euro area.
Trade barriers stifle innovation and efficiency
Last year's tariff increases are already weighing on the euro area economic outlook.
Beyond immediate export impacts, a deeper concern is that efficient, innovative, export-oriented firms may scale back or shut down due to higher tariffs.
This loss of strong producers leads to less efficient resource allocation and slower technology spread, causing overall productivity to decline.
Uncertainty amplifies these effects, prompting firms to adopt 'wait-and-see' strategies.
They delay investment and expansion, often shifting innovation from risky frontier research to safer, incremental projects.
While these strategies offer short-term protection, they slow technological progress.
A prolonged period of high uncertainty and profit pressure can thus weigh on growth for years.
Trade shocks hit productive exporters
Firm-level data from Germany, Spain, France, and Italy (2008-2023) reveals how trade tensions affect incumbent businesses.
Researchers analyzed over three million firms, identifying international market exposure by sectors with above-median sales to the United States.
A text-based index, capturing sharp spikes in tariff and trade dispute mentions, classified trade shocks, with the first Trump Administration marking a notable episode.
Results indicate that trade shocks lowered firms' expansion likelihood and increased their exit risk.
These effects were strongest for firms heavily exposed to the United States, which are also, on average, the most productive.
Their contraction or exit leads to a loss of productive capacity and dynamic economic elements, impacting overall growth.
Tariffs narrow policy options
Tariffs fundamentally reshape the macroeconomic landscape, limiting central bank policy options.
Slower productivity growth reduces potential output and increases inflationary pressures, restricting rate cuts during downturns.
This makes the economy more vulnerable to financing conditions, where even small rate increases can significantly slow investment.