The global economy is currently grappling with significant uncertainty, further intensified by the trade wars initiated by US President Donald Trump. The import tariffs imposed by his administration, e.g., 20% on EU goods and 34% on Chinese products, have disrupted global trade, driving up costs and complicating the functioning of supply chains. This protectionist approach, aimed at narrowing the US trade deficit, poses a serious risk of slowing down global economic growth. With traditional trade flows undergoing irreversible changes, a key pillar of Latvia’s economic progress must be the strengthening of manufacturing and exports, fostering productivity and innovation. Ultimately, the engine of growth will remain rooted in knowledge and entrepreneurship.
The US is shooting itself in the foot
The trade wars that Donald Trump views as a strategy to strengthen the US economy pose risks not only to the global economy but also to the United States. Valdis Dombrovskis, Vice President of the European Commission and Commissioner for Economic Affairs, has pointed out that the introduction of tariffs could reduce US GDP by 0.5–0.6%, while the impact on the EU is estimated to be somewhat lower, around 0.2–0.3%. Both China and the EU are already preparing retaliatory tariffs, which risk escalating the conflict, promoting the fragmentation of global trade, and increasing the likelihood of a recession.
The US President has announced a doubling of tariffs on steel imports, effective from June 4, which is expected to significantly impact European heavy industry. D. Trump asserted that the doubling of the tariffs “will further strengthen the US steel industry”.
In our view, Trump continues to play the usual game, one that, while initially unpredictable, is starting to reveal established patterns. Therefore, the proposed 50% tariff between the US and the EU is not a final measure but rather a tactic to exert pressure on the EU. One thing is certain: Trump’s negotiating tactics is harmful both to the US and the global economy, as it fuels uncertainty, discourages demand through making companies to adopt a “wait-and-see” approach, not only in the heavy metals sector. It must be accepted that accessing the US market will become more difficult and costly. However, the final tariff rates may remain unclear for quite some time. Meanwhile, it is worth closely following the Kiel Institute’s ongoing updates on the impact of tariffs. Regardless of Trump’s intentions, the US seems to be emerging as the relatively biggest loser in this trade conflict.
As far as the direct impact of the steel and aluminium export tariffs on Latvia is concerned, it is likely to be negligible. The total value of exports of these goods from Latvia and Estonia to the US amounts to 14 million EUR, while for Lithuania it is 92 million EUR. For Estonia, this represents 2% of exports to the US, for Latvia 2.5%, and for Lithuania 5%. European heavy industry will be most directly affected, especially Germany due to its export volume, and Luxembourg due to the high proportion of its exports to the US.
Regardless of Trump’s opinion, it seems that the US will be the relatively biggest loser. It cannot be ruled out that these moves are partly an attempt by Trump to divert attention away from the unstable state of US public finances and the growing problem of the US government's rising interest costs. The independent committee responsible for overseeing the US federal budget estimates that the national debt could rise by USD 3.3 trillion by the end of 2034, taking the debt-to-GDP ratio from 100% to a record 125%. At a recent investor conference, Jamie Dimon, CEO of JPMorgan, warned that the market is treating the stagflation risks posed by tariffs too lightly, simply because the economic impact has not yet been clearly noticeable.
Latvia’s exposure through trade partner relationships
Latvia’s exports to the US make up just 1.3% of GDP, so the direct impact of Donald Trump’s tariff policies on Latvia will be limited. However, the indirect effects through key trading partners like Germany and Sweden could be far more significant. The wood processing industry, which relies heavily on the US market, is especially vulnerable. Uncertainty around Trump’s so-called “strategic” policies is disrupting business planning and investment, forcing Europe and Latvia to explore new markets and boost competitiveness to mitigate potential shocks.
In the first quarter of this year, the Latvian economy remained roughly flat compared to the previous quarter but contracted by 0.3% compared to the first quarter of 2024. The construction sector made the largest positive contribution, while trade, the information and telecommunications industries, and tourism also experienced strong growth. However, weak overall growth was influenced by declines in electricity, gas and heat supply, manufacturing, education, healthcare, and public administration. Private household consumption was unexpectedly weak, falling by 1.1%. As a result, economic growth continued to stagnate during the first three months of the year.
Profit margins for European firms in China are shrinking
European companies operating in China have acknowledged that the slowdown in the Chinese economy is an even bigger challenge than the trade wars. A record 503 companies surveyed by the EU Chamber of Commerce in China reported that doing business in the world’s second-largest economy has become more difficult, and they were quite pessimistic about future profitability. 73% of respondents said that business conditions in China have worsened over the past year, the fourth consecutive year of deterioration. 71% of respondents said the economic slowdown in China has had the biggest impact on their business, followed by escalating tensions between the US and China.
Optimism about China’s short-term growth and profitability reached record lows of 29% and 12%, respectively. The importance of China for the global profits of European companies has also decreased. Seven out of ten respondents stated that earnings before interest and taxes (EBIT) in China are the same or lower than the global average. Nevertheless, many companies continue to source more components from China due to competitive prices.
Growth is expected to resume at a slow pace
Despite the challenging environment, a moderate return to growth in Latvia is expected in the coming quarters. Lower interest rates and continued real wage growth will support a recovery in consumption. While consumer caution will persist and limit growth potential, this caution is likely to diminish over time. The decline in interest rates has already contributed to increased lending, a trend expected to continue. The inflow of European funds, along with a rapid rise in defense spending, will boost investment activity.
Consequently, investment will be the main driver of growth this year, with increased construction activity further supporting growth in related sectors. The greatest risks stem from US economic policy and its potential side effects, which could hamper export growth. However, a recovery in exports could strengthen further and drive economic growth. Ultimately, the confidence factor will play a crucial role in the economy, with government policies playing a key role in shaping that confidence.
