Key Takeaways:
Trump’s second term is highly likely to see a return of tariffs targeting industries like technology, steel, manufacturing and aluminum. He plans to pass the Reciprocal Trade Act, allowing unilateral tariffs, and replace sanctions with tariffs. These could range from 10% to 100% for Chinese and strategic goods.
US production capabilities in sectors like steel, automotive and fossil fuels will likely increase by shielding these industries from foreign competition. Tariffs and efforts to reshore supply chains will likely incite retaliatory actions that harm sectors like agriculture and green tech.
Trump’s tariffs will likely hurt EU exports like machinery and automobiles, prompting responses like subsidies and WTO challenges. Tools such as the Anti-Coercion Instrument (ACI) may be used, but escalation to a full trade war is unlikely.
China’s economy will likely suffer, particularly in technology and manufacturing, as tariffs reduce the competitiveness of Chinese imports in the US market. Retaliatory tariffs and the redirection of surplus exports will likely destabilise global markets.
Trump’s trade & tariffs strategy
President-elect Donald Trump has promised tariffs on Chinese and EU imports as part of a package of "America First" trade measures. A major tenet of Trump’s trade policy is to be the Reciprocal Trade Act, seeking to grant the President greater authority to impose tariffs unilaterally. It would allow tariffs on countries with higher duties on US exports.
Before his re-election, Trump promised to impose a base 10% tariff on imports, which could go up to 60% and 100% for products coming from China and for goods affecting specific strategic sectors. During his last term, Trump adopted a similar approach to tariffs. With stronger political backing and Republicans controlling the Senate, Trump will likely have more success in obtaining the policy tools required for his tariffs strategy.
Trump also promised to substitute sanctions with tariffs, due to the economic benefits tariffs can have for domestic industry and the revenue that is created for the government, alongside the application of economic pressure.
The first Trump administration’s tariffs, which were maintained and expanded under President Biden, amounted to $79 billion. Trump will likely increase the number to an additional $524 billion annually.
US main imports and exports in 2023.
Source: The US Department of Commerce, International Trade Administration.
Tariffs on products from China
The US and China together contribute about one-third of global current account imbalances. The United States is China’s largest trade partner and accounts for around 15% of China's total exports.
Unsurprisingly, US tariffs have not been well received by Beijing, as China challenged the legality of 2018 tariffs by the Trump administration in the World Trade Organisation Dispute Settlement Body (WTO-DSB). These tariffs sought to impose a 25% duty on $50 billion USD worth of Chinese imports, targeted at electronics and machinery. In May 2024, the Biden administration implemented tariffs targeting Chinese exports such as:
Electric Vehicle (EV) (tariff increase from 25% to 100%)
Solar panels (tariff increase of 25% to 50%)
Semiconductors (tariff increase of 25% to 50%)
These tariffs have not incited significant reciprocal action, despite China’s Embassy in the US stating that “China will do whatever necessary to defend its own interests.” Beijing has at its disposal several instruments to counter US tariffs, which China employed during the previous Trump administration:
Disputing tariffs at the World Trade Organization (WTO)
Retaliatory tariffs on US products, specifically agricultural products, automobiles, and electronics
Export controls on US critical minerals, given China’s supply chain dominance of minerals like gallium and germanium, which are critical to US semiconductor manufacturing
China has seen its economy struggle as a result of US tariffs, but has used subsidies and cash injections in the past to defend itself. Resources were directed toward domestic consumption to offset the economic strain, given that the US represents 16.2% of Chinese export demand.
Tariffs on products from the EU
EU Imports and Exports with the US
Source: European Parliamentary Research Service, Eurostat.
Trade between the US and the EU is regulated by the World Trade Organization (WTO), as the US has no free trade agreement with the EU. Negotiations for a Transatlantic Trade and Investment Partnership (TTIP) were launched in 2013, but ended when Trump was elected in 2016 and were officially terminated in 2019.
In 2023, US tariffs averaged 3.3% on the EU compared to the EU's 5% on the US. Non-tariff barriers and higher EU rates on cars (EU 10% vs US 2.5%) and agriculture (EU 8.4% vs. US 4.0%) have contributed to a projected $230 billion trade deficit with the EU for 2024.
The European Commission holds exclusive control over foreign direct investment of its members, and the European Commission has established political levers like the Anti-Coercion Instrument (ACI) to counter US tariffs like those issued by Trump during his last presidency. The ACI aims to combat economic coercion through countermeasures like tariffs, sanctions, and restrictions on foreign direct investment. Its significance lies in providing a rapid response mechanism that doesn't require unanimity, allowing the EU to bypass objections from single countries. Instead, the Council of the European Union requires the vote of 55% of member states, representing at least 65% of the EU population, to approve countermeasures, enabling swift action.
On November 6th, the European Central Bank (ECB) leaders echoed previous Goldman Sachs’ and ECB’s reports, emphasising industrial output and growth risks from Trump’s proposed tariffs, while not noting concern regarding inflation risk. They noted that ECB policies have eased price pressures and projected inflation to stabilise at 2% by June-July of 2025, with the ECB maintaining flexible monetary policies and adjusting interest rates as needed.
Forward Look:
Tariff effects on the US Economy
KSG consultations concluded that Trump will likely utilise more (and higher) tariffs than in his first term. The focus will likely be on sectors that are strategically important such as:
Manufacturing
Steel
Aluminum
Automotive industry
Agriculture
Trump's policies may also intensify the tariffs on technology and semiconductors introduced under the Biden administration. Furthermore, targeted tariffs on both upstream raw materials and downstream products are likely to be implemented on goods listed below.
KSG assesses that the protectionist tariffs will have the desired effects Trump has outlined, increasing US businesses competitiveness and reinforcing national security through bolstering sectors like steel and energy, as well as reshoring supply chains where possible.
During Trump's first term, domestic production in sectors like steel and aluminum increased, leading to a rise in market share. KSG assesses that similar growth in industrial output is likely to continue during his second term. This growth will likely extend to other sectors, like automotive and machinery, which will be shielded from EU competition.
KSG estimates that Trump's trade strategy will likely be accompanied by a withdrawal from the 2016 Paris Agreement, with a focus on boosting fossil fuel development. This will likely lower energy costs in the US, boosting the competitiveness of domestic industries.
Despite this approach, KSG assesses that the 2022 Inflation Reduction Act and the related environmental legislation will likely not be entirely repealed by the Trump administration, as they provide investment in the economy of many Republican-controlled states. Some of the possible changes to Biden’s legislation will likely include a ban on offshore wind projects and the end of EV tax credit.
KSG estimates that Trump’s initiatives and tariffs will have a mixture of effects on the American EV market. Higher tariffs on battery materials and manufacturers, particularly those from China, could impact the prices of critical materials like cobalt and fluorspar. KSG previously assessed the Trump administration’s need to recalibrate US supply chains for certain critical minerals going forward. Additionally, both Trump’s new tariff proposals and those already implemented by the Biden administration on electric vehicles could drive non-American competitors out of the US market completely. US automakers like Tesla will likely benefit from reduced competition, despite the inevitable supply chain disruptions.
Effects on China and its response
KSG assesses that Trump’s trade policies will likely significantly damage China’s economy. China is likely to experience contraction in its GDP and a reduction in its export competitiveness in key sectors like technology, energy and manufacturing. Effects of this will likely be seen by Summer 2026.
KSG believes that Trump will implement aggressive regulations to curb Chinese ownership in critical US sectors such as energy, technology, medical supplies, and telecommunications. These measures would include forcing Chinese companies to divest from holdings that are deemed threats to national and economic security. More Chinese companies will likely be included in the Entity List, which will make conducting business with US companies almost impossible.
KSG assesses that US tariffs and sanctions on products with Chinese components will be combined with efforts to push US allies toward economic decoupling from Beijing. This will likely further damage the Chinese manufacturing sector.
Furthermore, KSG notes that if the US imposes numerous and high tariffs on China, surplus Chinese exports will likely flood other markets. US allies like the EU will also likely be pressured to follow the US in imposing new tariffs against China regardless, in exchange for more favourable treatment by the US.
KSG assesses that China is likely to respond to US tariffs by retaliating and matching the tariffs one for one, potentially inflicting severe damages to key sectors of the US economy. Much like during the last trade war, KSG believes that the most affected sector will be US agriculture. To counter US unilateral actions, China has strengthened its response tools, and will deploy the new Tariff Law (April 2024) and the Anti-Foreign Sanctions Law (2021), to impose anti-dumping and counter-tariffs against individuals and companies.
Effects on BRICS nations
The economies of certain BRICS countries could also be impacted by Trump's tariff strategy. During his campaign, Trump vowed that any moves by countries to pursue de-dollarization could lead to an increase in tariffs of up to 100%. KSG consultations concluded that this figure may be high but that Trump would readily utilise a tariff of over 50% to deter de-dollarization.
Effects on Canada and its response
US tariffs on Canada will mainly involve crude oil and the manufacturing sectors. KSG believes that if the proposed tariffs are imposed, they will likely negatively impact both economies. If a solution is not negotiated before Trump takes office, Canada will likely see reduced oil production and a weaker currency. In the US, car and gasoline prices may rise considerably in the Midwest and manufacturing supply chains may face disruption. These changes could undermine Trump’s promises to lower energy costs and raise inflation.
Given these mutual risks, KSG assesses that the US and the Canadian government will likely negotiate an agreement to avoid the imposition of blanket tariffs between the two countries. Canada is highly dependent on the US for exports and imports, and has threatened the possibility of retaliatory measures if the tariffs go forward, a scenario that could cause major damage to the US economy.
Effects on Europe and its response
KSG assesses that the EU is also set to be majorly affected by Trump’s tariffs. Goods that the US government already considers critical goods, that are key European exports to the US, including machinery, autos, chemicals, and agri-food, are particularly vulnerable.
From the beginning of Trump’s term, the EU will likely increase its purchase of American goods, including Liquefied Natural Gas (LNG). KSG believes the EU might use energy exports as leverage to obtain favourable deals on tariffs. KSG consultation suggested that while this is in line with Trump’s transactional approach to diplomacy, the President will likely seek additional concessions.
KSG assesses that the EU is unlikely to match the US tariffs one-for-one, as economic impacts vary widely across member states based on their exports to the US. The EU could potentially challenge tariffs by appealing to the WTO as well as utilising the Anti-Coercion Instrument. These actions, coupled with the EU’s technical trade barriers, could become leverage in negotiations, with the EU promising to reduce restrictions in future trade deals with Trump. KSG assesses that considerable retaliation risk triggering a trade war, potentially harming the EU more than the tariffs.
In his previous term, Trump leveraged tariff threats as bargaining chips with individual states. EU member states such as Hungary are likely to respond to his trade policies with uncoordinated bilateral deals that would weaken collective EU negotiating power.
KSG assesses that several EU countries will have the opportunity to informally negotiate with the US a better deal on their products. Among these, cooperation and negotiations will most likely take place with countries that are politically aligned with Trump, like Italy. Nations like Spain and Germany, conversely, will likely be hit by tariffs that will damage the already precarious relations with the US. Germany, in particular, if not helped by the EU, could face severe economic losses, as its exports with the US are worth roughly $160 billion.
To address Trump’s criticisms of European NATO members’ defence spending, the EU or individual states are highly likely to try and placate the US increasing spending to obtain a better deal on tariffs. Such spending could benefit American defence manufacturers in areas where the EU relies heavily on US capabilities, as well as European defence companies.
Effects on the UK
KSG believes that the UK will try to pursue US tariff exemptions and trade privileges under Trump, leveraging its “special relationship” with the US. The UK is not set to be as affected as the EU by US tariffs. British luxury goods exports to the US may be impacted, but the bulk UK trade is in services, less vulnerable due to their limited tariff exposure. Nevertheless, KSG believes that the UK may face heightened pressure to negotiate a free trade agreement with the US, which could include trade-offs in regulatory alignment or market access.
Effects in the Middle East
US tariffs on Chinese products will likely see many of them redirected to the Middle East. KSG assesses that increased maritime traffic will likely prompt infrastructure investments by Beijing in the UAE and Saudi Arabia.
Effects in Africa
KSG wargaming suggested that African nations, particularly those involved in the Belt and Road Initiative, will be indirectly affected by US tariffs given the disruption they will cause to the Chinese economy. Countries like South Africa and Angola, which export raw materials to China, will experience price volatility in commodities.
Effects in Southeast Asia (SEA)
KSG assesses that SEA countries are likely to experience indirect effects from US tariffs, as both US and Chinese companies may attempt to reroute goods through countries like Thailand, Vietnam, and Cambodia to avoid the tariffs. These countries have become important suppliers of solar panels to the US after Biden's tariffs on Chinese solar products. However, if US authorities start implementing stricter measures on Chinese components or intermediate goods from SEA, these countries could then face tariffs themselves and may be forced to shift focus to different markets.
Nations like Thailand, Indonesia, and Malaysia will likely face mounting political and economic pressures as they balance their relations with both the US and China. Trump's tariffs could potentially lead these countries to rely more heavily on regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) to avoid US trade complications.
Latin America
KSG assesses that several Latin American countries, despite having trade agreements with the US, are likely to face economic impact from proposed tariffs. Mexico, in particular, stands to be the hardest hit due to Trump's threat of a 200% tariff on cars imported from the country. Despite its trade agreement with the US, Mexico could suffer from both direct tariffs and from becoming a primary target for companies attempting to reroute trade to bypass US sanctions.
KSG believes that Brazil and other Latin American countries seeking to reduce reliance on the US dollar or procure greater Chinese investment, may be targeted by heightened tariffs under Trump's policies. South American governments seeking to strengthen ties with China might also be targeted, even if they do not hurt US interest directly.
Most Likely Scenario in Twelve Months (December 2025)
High tariffs will have been implemented soon after Trump’s inauguration, with a 10% base tariff on imports and steep increases on Chinese and strategic sector goods (up to 100% on select items). Trump will have passed the Reciprocal Trade Act in Congress, using unilateral tariff power to pressure the EU and China, and will be progressively increasing existing tariffs from $79 billion to $524 billion annually.
US sectors like steel, aluminum, automotive, and agriculture, shielded from EU competition, will have increased domestic production growth in these areas. Energy policy will have shifted to prioritising fossil fuels, lowering costs and boosting US industrial competitiveness, though Trump will have left some of Biden’s environmental policies in place, like renewable energy investment in Republican states.
China’s export sectors, especially technology and energy, will have faced challenges due to higher tariffs and export controls. The Chinese green energy sector will have stagnated as the export revenue needed to subsidise research and development in the sector is curtailed by US tariffs. The Chinese technology sector will have experienced difficulties resulting from the continued inability of its domestic semiconductor industry to produce advanced chips, due to Chinese semiconductor isolation following the recent halt of the Taiwan Semiconductor Manufacturing Company (TSMC) chip sales to China. China will have retaliated with matching tariffs, targeting US agricultural exports and key sectors like automobiles and electronics.
High US tariffs on China will have redirected surplus Chinese exports to Europe and other areas of the world, while the US will be lobbying the EU and Asian powers like India to raise their own tariffs. By December 2025, the lobbying will have been successful in some areas for the US, with further progress likely over the full four year term.
US sanctions targeting Chinese components will have disrupted European companies reliant on integrated supply chains.
Uncertainty over tariff details will still be delaying major corporate investment decisions in both the US and Europe. EU companies will be looking to shift production to countries like Vietnam, bypassing tariffs.
The European Commission will likely have challenged tariffs at the WTO and deployed the Anti-Coercion Instrument (ACI), using it as leverage in negotiations, but will have likely avoided escalating to a full trade war, and will be in the process of starting negotiations on tariffs.
Countries like Germany and Italy, heavily dependent on exports, will have focused on subsidies to protect industries (e.g., automotive).
Middle Eastern countries will be facing increased import prices, particularly from China.
New tariffs will be inflationary, raising costs on imported goods. The rise will have started in the US, with the Federal reserve slowing down its cuts to interest rates in 2025. Inflation will eventually spread to the EU in 2026, forcing the ECB to review its policy and to keep interest rates high to control inflation.