EU tariff retaliation caused lasting trade shifts without inflation
A Federal Reserve study reveals that the European Union's 2018 retaliatory tariffs against US steel and aluminum led to a lasting decline in US imports without causing domestic price pressures. The tariffs targeted goods with low US import dependence and high substitutability.
EU's targeted retaliation reshapes trade
The European Union's 2018 retaliatory tariffs against US steel and aluminum duties strategically targeted goods with low US import dependence and high substitutability.
This approach aimed to minimize domestic economic disruption while maximizing pressure on the US to rescind its tariffs.
The study found that for most tariffed goods, the US share of EU imports notably declined and remained below pre-2018 levels even after the retaliatory tariffs were lifted in January 2022.
This demonstrates an asymmetric effect of tariffs on trade diversion, leaving permanent scars in US-EU trade flows.
Furthermore, US exporters did not absorb the costs; tariffs were instantly and fully passed through to EU importers, consistent with findings for US tariffs.
Inflationary impact averted
Despite the immediate pass-through of retaliatory tariffs to EU importers, the study found no evidence of inflationary effects on consumer and producer prices within the European Union.
This outcome is attributed to several design features of the retaliation package.
The package was moderate in size, affecting only 1.5 percent of all US goods imports to the EU, with the second stage of tariffs never implemented.
This limited scope meant the cumulative tariff cost was approximately $2.9 billion over 3.5 years, a negligible amount compared to total EU imports.
Additionally, the asymmetric design distributed potential costs across a variety of products, many of which had a low US share of EU imports.
This enabled EU importers to easily source from alternative suppliers, mitigating price increases.
A blueprint for future trade disputes
This research fills a critical gap by providing empirical evidence on the effects of tariff retaliation on the retaliating economy.
The EU's strategic approach offers a blueprint for how economies can mitigate self-harm while exerting pressure in trade disputes.
Its findings are particularly relevant given the ongoing global protectionist trends and the EU's recent 2025 retaliation package, suggesting a tested strategy for future trade conflicts.