The implementation of a 20% tariff on goods from Europe might result in deflation, causing decreased price levels within Europe.
This could result from a rise in production both from China and within the European Union.
"One factor contributing to reduced pricing within the EU will undoubtedly be increased exports from nations such as China, whose goods are increasingly directed toward European markets," said Niclas Poitiers, a researcher at the Bruegel institute, to Euronews.
"The second reason explaining how Europe might experience a decline in prices is that certain exports intended for the United States are now staying within the European markets," he further stated.
Suppose you currently impose high custom duties on Italian wine; as a result, more of this wine may enter the single market, leading to lower product prices.
Reduced prices appear to boost the purchasing power and consumption among Europeans, which could consequently foster economic growth.
However, on the contrary, deflation can be detrimental to the economy since it prompts families to delay their buying decisions, anticipating even lower prices in the future.
This leads to a cycle where decreasing salaries result in increasing joblessness. Thus, we might pay less for goods, yet at what cost?
Uncertainty ahead
According to Tobias Gehrke, who works as a researcher for the European Council on Foreign Relations (ECFR), the biggest threat to the economy stems from uncertainty.
"These tariffs are across-the-board. They will impact all goods and exports moving from Europe to America, including items like machinery, chemicals, and automobiles. This could potentially impose a significant burden on these businesses," he explained to Euronews.
The primary concern I see is the significant risk posed by this uncertainty. It might lead businesses to refrain from investing in Europe, which could result in detrimental consequences for employment and economic expansion within a period of several months or years.
However, economists don't have a crystal ball, and there are many unknown factors that make predictions difficult.
In particular, China's reaction and the EU's response will weigh heavily in the balance, while US President Donald Trump could also use tariffs as leverage in other negotiations.