US trade policy has become much more protectionist since the beginning of 2025. The United States has sharply increased its import tariffs and openly challenged core principles of the rules-based multilateral trade order. This article examines the macroeconomic repercussions of this realignment, placing it in the context of the longer-term trend of growing geoeconomic fragmentation. 

So far, the US tariff increases have had only a limited impact on the global economy. This is partly because some tariffs were lowered again after a phase of escalation and many trading partners decided against sweeping retaliatory measures. In addition, anticipatory effects ahead of tariff increases and strong demand for AI-related goods supported global trade. A stronger or longer-lasting escalation of the trade conflicts would have caused much greater harm to the global economy. However, the robustness of the global economy so far should not blind anyone to the fact that protectionism comes with substantial costs. Indeed, trade restrictions entail noticeable welfare losses in the long term.

Some of the United States’ own key tariff policy objectives have not yet been fulfilled. The trade deficit has remained high, tariff costs played a key part in the persistently high domestic inflation, and there is no sign of a broad-based reindustrialisation. Germany and the euro area have been affected primarily through weaker exports to the United States and increased trade policy uncertainty. Overall, however, the macroeconomic effects have so far remained limited. 

The restrictive trade policy measures taken recently by the United States are amplifying an already apparent fragmentation of the global economy along geopolitical lines. The challenge for the European Union is to hold its own as a trade policy player in this harsher external environment. This will require a reduction in critical dependencies and an expansion of relations with reliable trading partners, for example through new trade agreements. At the same time, an open, multilateral trade order remains crucial. However, its rules should be refined in areas where they are reaching their limits, without undermining the fundamental principles.

Since January 2025, US trade policy has become much more protectionist. Although the United States had already raised import tariffs in 2018 and 2019, its trade policy measures were then mostly confined to China and their scale was manageable from a macroeconomic perspective. 1 The measures adopted since the beginning of 2025 have gone well beyond that. The US administration raised import tariffs across the board, placing a greater emphasis on certain trading partners and sectors. Overall, the average US import tariff rate rose from 2.3 % in 2024 to almost 12 % at present – a level last reached in the early 1940s. 2

The US administration gave trade, security and industrial policy objectives as justification for its tighter tariff policy. The main motives included reducing persistent trade deficits, which were interpreted as being caused by unfair trade practices, and strengthening the domestic industrial base. This objective was related to the growing competitive pressures from Chinese firms in global markets. China’s state-led industrial policy and the strong expansion of its industrial capacity have been accompanied in some sectors by competitive distortions and overcapacity. In addition, tariffs have been used for foreign policy objectives; for example, they have been imposed on Canada, Mexico and China with reference to illegal migration and international drug trafficking. Finally, the US administration presented import tariffs as being a potential source of revenue to limit the budget deficit, whilst also repeatedly stating the view that the costs would largely be borne by foreign trading partners.

Although the realignment of US trade policy has followed a clear underlying protectionist trend, the specific form it has taken has been subject to frequent changes and uncertainty. Tariff rules were repeatedly adjusted, temporarily suspended or had new exemptions added. Furthermore, there were court disputes over the legality of individual measures. 3 This increased trade policy uncertainty for firms worldwide, and made decisions about investment, procurement and production locations more difficult.

Most trading partners concluded agreements with the United States to avoid an escalation of the trade dispute. The process began with the country-specific additional tariffs announced on “Liberation Day”, through which the US administration intended to even out what they perceived as competitive disadvantages for the United States and reduce persistent bilateral trade deficits. Almost without exception, the trading partners made concessions to the United States on important points. The pattern was that trading partners accepted a US import tariff that was higher than before but lower than what had been threatened and, in return, allowed easier market access for US exports. This was mainly due to the great importance of the US market for many exporting countries and the concern that countermeasures would lead to an escalation of trade policy, causing severe damage to their own economy. For some countries, dependencies on the United States in other policy areas, such as defence, probably played a non-negligible role, too.

The EU and the United States also passed a trade agreement. The agreement provides for a tariff ceiling of 15 % for the vast majority of EU exports to the United States. 4 Compared with the average tariff rate of around 1.2 % in 2024, this is a significant increase. Market access conditions for European exporters thus worsened markedly compared with companies operating in the United States. The agreement was broadly in line with the conditions that the United States imposed on other significant trading partners, such as Japan and South Korea. 

China, by contrast, initially responded to US tariff increases with sweeping trade policy countermeasures. In the spring of 2025, the tariff dispute between the United States and China escalated. Both countries sought to outdo each other by imposing huge tariffs on the other. In addition, China implemented export controls on rare earths, an area where it has a very strong market position along key parts of the value chain. The two countries then agreed on a significant reduction in reciprocal tariffs. This stabilised trade relations but did not end the conflict. Both countries are continuing their efforts to reduce mutual dependencies.

The tighter US tariff policy hit the global economy hard and amplified the trend towards fragmentation in the global trade landscape. Against this backdrop, this article first examines the global economic impact of the new US tariffs. It analyses the direct and indirect effects on trade, production and prices. Trade policy developments are then placed in the context of the longer-term trend of growing geoeconomic fragmentation in the global economy. The focus is on how Europe can strengthen its economic resilience in a more power-based trade policy environment without sacrificing the benefits of open markets and rules-based multilateral cooperation.

Macroeconomic developments in the United States remained robust following the introduction of the new tariffs. Real GDP rose by 2.1 % in 2025. This meant that growth was weaker than in the previous years, but remained in the region of potential growth. Supporting factors, especially the AI investment boom, more than offset the negative effects of tariff policy. 

Tariff policy led to considerable fluctuations in US imports. Imports were brought forward to a considerable extent in the run-up to the tariff increases. US imports of goods rose sharply in the first quarter of 2025 across many countries of origin. Following the entry into force of many additional tariffs announced on “Liberation Day”, they fell again significantly. At times, imports of intermediate goods, consumer goods and motor vehicles were around one-fifth below their 2024 level in real terms. At the same time, imports of capital goods rose considerably. On an annual average of 2025, imports of goods exceeded their previous year’s level by 2½ %. 5 This suggests that, once tariffs were introduced, import demand was dampened, but the decline for the year as a whole was limited by the robust economic situation, the exceptional boom in the high-tech segment and anticipatory effects.

The US administration’s objective of significantly improving the trade balance has not been fulfilled thus far. The deficit in the trade balance contracted somewhat as a percentage of GDP but remained high, at around 3 % in the first quarter of 2026. The slight improvement was mainly due to rising exports. This development is likely to have been supported by exchange rate movements: in 2025, the US dollar depreciated significantly against the euro and a broad basket of currencies. This depreciation contrasted with standard macroeconomic models, which would point to an appreciation of the US dollar in response to the sharp tariff increases. The depreciation probably reflects factors that reduced demand for assets in the United States. These included concerns about trade wars with negative repercussions for the US economy and an apparent increase in uncertainty among market participants regarding the reliability of US trade policy and US economic and fiscal policy in general. 6

The tariff burden has so far been borne largely in the United States. Import prices in the United States continued to rise last year, even without taking tariffs into account. This counters the notion that foreign exporters compensated for the higher tariffs to a substantial and lasting extent by lowering prices. A detailed Bundesbank econometric analysis confirms this picture. 7 According to these figures, an increase of 10 percentage points in the tariff rate led to a short-term decline of just over 5½ % in import prices before tariffs. In the following months, however, the price decline rapidly receded. This meant that, after a short period of time, the tariff burden was borne almost entirely by US importers.

The cost burden spread beyond directly affected imports along the value chain. Many imports of intermediate inputs became significantly more expensive for US customers. The associated cost increases were passed on with a lag to downstream production stages, and ultimately to final consumers. Accordingly, consumer goods inflation has increased again markedly since the beginning of 2025. According to our estimate, up to February 2026 just over 80 % of the price effect that would be expected under full tariff pass-through was reflected in consumer prices. The estimate indicates that US import tariffs increased the inflation rate, as measured by the private consumption deflator, by 0.6 to 0.7 percentage point in February 2026. 8 Nevertheless, inflation saw only a limited increase overall, as services inflation slowed markedly at the same time.

So far, US tariff policy has not triggered a process of reindustrialisation. There is still no sign of a broad-based recovery of industrial production in the United States. Employment developments in US industry show no indication of this yet, either. On the contrary, the number of employees in the manufacturing sector continued to fall in 2025. 9 Only recently was there a small rise. Moreover, neither the prospect of circumventing tariff barriers nor the various trade agreements seem to have led foreign enterprises to relocate production to the United States on a substantial scale. Nominal foreign direct investment flows to the United States in 2025 were actually slightly down on the previous year’s figure. 10

The global economy, too, has so far proved resilient to US tariff increases. The marked dips in global economic activity and global trade which many expected to see following “Liberation Day” did not materialise in the form anticipated (see the supplementary information entitled “Model-based estimates of the global impact of US tariffs)”. 11 In fact, global trade continued to expand briskly in 2025, and global GDP growth exceeded expectations. German economic activity also held up better than risk scenario estimates suggested. 12  

The fact that trade conflicts did not end up escalating is likely to have played a key role in the global economy's unexpectedly buoyant performance. On the occasion of “Liberation Day” on 2 April 2025, the US administration announced a base tariff of 10 % as well as significantly higher country-specific tariffs, including a 20 % tariff on goods from the EU. However, these higher tariffs were soon suspended for most countries and became the object of negotiations. 13 Ultimately, the United States reached agreements with most trading partners, settling on tariff rates that were well below the original threats; at the same time, the trading partners of the United States not only refrained from imposing retaliatory tariffs, but in some cases also granted the USA considerable trade concessions. 14 In addition, the average tariff rate actually paid was significantly lower than suggested by calculations based on 2024 trade weights: imports subject to heavy tariffs declined, while those subject to lower or no tariffs gained in importance. 

The sharp rise in demand for AI-related goods was another factor behind the global economy's strong performance. The new tariffs did dampen US demand for traditional imports such as intermediate and consumer goods. However, imports of AI-related goods surged and more than offset this effect. 15 The AI boom is going hand in hand with a massive ramping-up of physical computing infrastructure. This requires chips, storage, servers, networking technology and other high-end capital goods manufactured around the world. As a result, US imports remained robust overall and supported global trade. 16 In addition, import activity was brought forward in anticipation of the tariff hikes, which temporarily boosted trade volumes significantly. Global trade also benefited from strong demand for AI-related goods beyond the United States. According to the World Trade Organization (WTO), such goods accounted for around 42 % of the increase in global trade in goods in 2025, despite only making up around one-sixth of global trade. 17  

China sustained significant losses in its export business with the United States, but was able to cushion the blow by increasing deliveries to other sales markets. While Chinese exports to the United States fell by around one-third due to tariffs, exports to other markets – especially to other Asian countries as well as to Africa and Europe – grew. Some of the additional exports to Asian countries are likely to have continued their journey from there to the United States, circumventing the high US tariffs on imports from China. 18 However, China’s success as an exporter in other regions of the world cannot be put down to redirection effects alone. Longer-term developments, such as the expansion of industrial capacity, technological advances and weak domestic demand in China, were factors of greater importance. By contrast, there is barely anything to indicate that price reductions have been used to achieve a large-scale diversion of goods originally intended for the United States. In particular, such price-driven effects played only a minor role in the increase in Chinese exports to the EU (see the supplementary information entitled “Possible tariff-induced diversions of Chinese exports to the EU”). 

German exports to the United States declined noticeably over the course of the year. Motor vehicles and parts, chemical products, machinery and electronics, in particular, were affected. 19 These losses are painful for the German export industry, as the United States is one of its most important export destinations. In addition, another key export market – China – has been performing weakly for some time. In macroeconomic terms, however, the burdens stemming from weaker exports to the United States are likely to have been tempered by a significant uptick in exports to other regions, especially to other EU countries. Nevertheless, the US tariffs increased the adjustment pressure on sectors heavily geared towards the United States.

US tariff policy increased trade policy uncertainty, which weighed on the global and German economy. It was not only the level of tariffs but also their lack of consistency that made it difficult for firms to assess future trading conditions. Repeated changes to announcements, deadlines and exemptions, as well as the prospect of bilateral agreements, all contributed to this uncertainty. From a macroeconomic perspective, uncertainty perceived by German firms increased only slightly. However, in the case of firms with export ties to the United States it climbed significantly more strongly following “Liberation Day” (see the supplementary information entitled “The impact of “Liberation Day” on the uncertainty perceived by German firms”). This is likely to have contributed to the investment restraint displayed by the firms affected. 20  

In addition to short-term trade and price effects, tariffs are likely to impair the growth potential of the economies affected. The effect that tariffs and other protectionist measures exert on economic activity, prices and trade flows is not merely temporary. These measures can also dampen productivity and real incomes in the longer term. Such effects often take some time to come to light, and it is not yet possible to reliably quantify them for the new US tariffs. However, theoretical considerations and experience with previous episodes of trade policy tightening suggest that there are several transmission channels at play.

Trade barriers can impair competition and productivity in the long term. Import restrictions reduce the competitive pressure on domestic producers. As a result, resources may remain tied up in less productive firms rather than migrating to more efficient providers. The macroeconomic costs thus arise not only through lower trading volumes, but also through an inefficient allocation of labour and capital. 21 A reduced degree of competition can also encourage higher margins and diminish consumer welfare. 

Economies of scale and product diversity also suffer when insularity increases. Trade barriers make imports of intermediate inputs more expensive and, if trading partners impose retaliatory measures, can diminish the availability of sales markets to exporting firms. Fixed development, production and distribution costs are then distributed across smaller volumes of goods, meaning that economies of scale are utilised to a lesser extent. At the same time, product diversity and opportunities for consumption dwindle. 22  

Lastly, protectionist measures can dampen innovation and investment. Research, technology adoption, and product development typically go hand in hand with high upfront costs and tend to be more worth the outlay for those with access to larger markets. Tariffs and other trade barriers reduce this sales base. At the same time, they make intermediate inputs and capital goods more expensive or more scarce. This can hamper modernisation and innovation. 23 24  

In line with these reflections, empirical analyses provide clear evidence that broad-based tariff hikes dampen productivity and output. According to estimates in the literature, a ten-percentage-point increase in the average import tariff rate reduces aggregate output in the country imposing the tariffs by around 1 % after five years. 25 Productivity, measured as the ratio of GDP to employment, declines by about twice as much as output. These effects do not materialise immediately: it takes four to five years to reach their full magnitude. The finding that the macroeconomic impact of the tariff escalation has not been particularly large so far should therefore not blind anyone to the fact that protectionism comes with substantial costs. In the long term, trade policy restrictions are typically associated with significant welfare losses.

The recent restrictive trade policy measures introduced by the United States form part of a long-standing trend towards fragmentation in the global economy. For a period of several decades, global economic developments were characterised by ever deeper integration and far-reaching moves towards a liberalisation of international trade. Recent years, however, have seen a significant increase in geopolitical conflicts. Against this backdrop, geopolitical and security considerations have taken on greater significance in economic decision-making. Trade policy measures have been presented not only as a way of correcting unfair competitive conditions, but also – increasingly – as a way of safeguarding strategically relevant industries and reducing dependencies. The new US tariffs therefore represent a development whereby the borders between trade, industrial and security policy are becoming increasingly blurred. 

One key driver of geoeconomic fragmentation is China’s economic rise, which has shifted global power relations. Through its increasing integration in international trade links, China’s economic and strategic weight has grown considerably. This is due not least to the country’s pivotal role in the manufacture of numerous intermediate goods 26 and as an important market for products from western countries. At the same time, these linkages can serve as an instrument of power, with economic dependencies leveraged to assert political interests. Advanced economies might therefore be keen to reduce dependencies on China so as to minimise their own vulnerabilities and safeguard their economic policymaking leeway. 27  

The rivalry between the United States and China is a particularly clear illustration of this. It is centred, most of all, on technology – a space where access to key technologies and the raw materials required for them are increasingly being treated as a security and industrial policy issue. However, the rivalry stretches far beyond bilateral US‑China trade. It has an impact on the way in which global supply chains are set up.

Geoeconomic fragmentation is associated with changes in the structure of international trade. An environment of heightened geopolitical risk and trade policy uncertainty prompts firms to diversify or regionalise their supply chains to a greater extent. Production capacity is relocated closer to sales markets or is organised within groupings of countries that are more closely linked in political terms. In the academic literature, shifts of this nature are referred to as friend-shoring or near-shoring. 28

Empirical analyses show that trade intensity between countries with differing geopolitical stances has declined. To analyse the impact of geopolitical factors on international trade, we divide countries into three groups for the sake of simplicity: a western bloc that – geopolitically-speaking – tends towards the United States, an eastern bloc that is more closely associated with China, and a group of neutral countries. 29   Since 2022, there has been a decline in the share of global trade accounted for by trade between the western and eastern geopolitical blocs. At the same time, trade with neutral countries has gained in significance, while the shares of intra-bloc trade have remained broadly stable. An econometric analysis based on a gravity framework confirms the finding of growing trade fragmentation. It shows that trade between the two geopolitical blocs (west/east) had already been on a comparatively steady decline since 2018 compared with trade within each bloc. 30 Towards the end of the analysis period, trade between the west and east relative to trade within each geopolitical bloc was around 30 % weaker than would have been expected on the basis of previous trade patterns. 

Geoeconomic fragmentation exacerbates the trade-off between efficiency and resilience. Globalisation has long contributed to the international specialisation of production processes, enabling significant productivity and welfare gains. Greater politicisation of economic relationships can impair the international division of labour and diminish the advantages afforded by specialisation. 31 Economic policy must carefully weigh up which areas warrant greater diversification or regional protection. 

These developments pose particular challenges for Europe. The economies of Europe, and particularly Germany, have traditionally been highly interlinked and benefit especially from open markets and stable multilateral trade rules. Increasing fragmentation of the global economy could therefore hit Europe comparatively hard. 32 At the same time, the size of the Single Market makes the EU an attractive trading partner for many economies. The EU needs to deploy this economic weight in a targeted manner in order to confidently assert its interests against large economic areas such as the United States or China. 

The experience gained from the trade conflict between the United States and China underscores the need for Europe to reduce risks stemming from critical dependencies. Following the massive escalation of the trade dispute with the United States in the spring of 2025, China introduced general export controls on rare earths, which also affected the EU. This shows that economic dependencies can quickly become vulnerabilities in geopolitical conflicts. For a long time now, the EU has been pursuing a strategy of economic resilience and diversification in order to reduce such vulnerabilities. With regard to China, this strategy is often referred to as “de-risking”. 33 This is intended to address a coordination problem: procurement decisions taken by individual firms typically take insufficient account of the macroeconomic damage associated with the potential absence of these goods. This can justify government intervention provided that it remains limited to clearly identified critical dependencies and does not lead to widespread self-isolation.

Despite mounting geopolitical tensions, the multilateral trading system with the WTO at its core is likely to remain attractive to a large part of the global economy. Small and medium-sized economies, in particular, depend on reliable and rules-based trade relations and benefit from the WTO’s institutional structures. Core principles, such as the most favoured nation (MFN) principle, ensure that trade benefits are enjoyed by all members. Despite the new US tariffs, a large part of global trade continues to be conducted within the WTO framework. 34 There is no sign of a general departure from the core principles of the WTO. That said, parts of the WTO rules are in need of reform. A particular need for adjustment exists to better capture government subsidies, government-linked firms and opaque promotional practices. Reforms should generally aim to strengthen the binding effect of the rules and to preserve the principles of an open, non-discriminatory trade order. Constructive cooperation from all major trading nations – including the United States and China – would be key to this.

An important starting point for the EU is to intensify relations with its trading partners. In addition to strengthening and reforming the multilateral trading system, bilateral and regional trade agreements can help diversify selling and buying markets, anchor standards and strengthen economic cooperation with rules-based partners. The provisional application of the trade agreement with the Mercosur countries since May 2026, as well as the recent negotiations with India and Australia, are steps in this direction. Nevertheless, we must not place too much stock in the possibilities of such agreements. They can only gradually complement existing linkages with large economic areas such as the United States or China, and their impact often only unfolds over longer periods of time. 35  

In addition, developing and refining the European single market will take on a crucial role. Further deepening the Single Market can strengthen Europe’s economic resilience by facilitating economies of scale, fostering competition and productivity, and reducing dependence on non-European markets. It should be promoted, in particular, in critical areas where dependencies are greatest, such as energy and capital markets and parts of the services sector – for instance, financial market services and digital services in the areas of IT and artificial intelligence. 36 It is particularly in an environment of increasing external uncertainty that stronger internal integration can help to better exploit Europe’s growth potential and cushion adverse effects of geoeconomic fragmentation.

The much more protectionist US trade policy since the beginning of 2025 has presented the rules-based international trade order with a challenge. The US administration has raised import tariffs to an unprecedented extent. In so doing, it has called into question core principles of the rules-based, multilateral system of trade and moved increasingly towards the use of raw power to pursue its own interests. To a degree, the swing in US trade policy should be seen as a response to China’s growing importance in global markets, which is likely to have been aided and abetted by competition-distorting government intervention. This poses significant trade policy challenges. From an economic perspective, however, broad-based tariffs are only partially suited to addressing them.

So far, the realignment of US trade policy has had only a limited impact on the global economy. This is partly because some tariffs were lowered again after a phase of significant escalation and many trading partners decided against sweeping retaliatory measures. Despite the burdens, global trade proved robust, supported by dynamic demand for AI-related goods. However, US tariff policy is likely to have amplified trade policy uncertainty worldwide, especially in the face of ever-new threats, exemptions or tightening. 

Some of the United States’ own key tariff policy objectives have not yet been fulfilled. The trade deficit has narrowed only slightly and remains high. Nor is there any sign of a broad-based reindustrialisation. The costs of the tariffs appear to have been borne predominantly within the United States so far, where they fuelled upward pressure on prices.

Beyond short-term trade and price effects, protectionist measures entail considerable longer-term risks. Tariffs can impair competition, productivity and thus potential growth. The fact that the global economy has seen robust growth should therefore not be interpreted as meaning that protectionism will not come with a “price tag”. Indeed, trade restrictions could entail significantly higher welfare losses in the long run.

In the face of a changed global economic environment, Europe needs to draw a closer conceptual connection between openness, resilience and competitiveness. Growing geoeconomic fragmentation is changing the framework for international economic cooperation. The challenge Europe is facing is to adhere to the fundamental principles of an open, rules-based economic order whilst at the same time strengthening economic resilience. WTO-compliant trade and industrial policy measures can help to limit external vulnerabilities. Moreover, new trade agreements can improve access to growth markets, diversify supply relationships and enhance rules-based cooperation. However, neither is a substitute for leveraging reliable framework conditions, a deeper internal market and supply-side reforms in order to strengthen Europe’s own competitiveness.

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