Europe woke up today to a new world of trade. Trade relations have been rewritten. Many things have gone well for Donald Trump so far, and many other things have gone wrong, and tariffs fall into the latter category. Unfortunately for the EU, these tariffs provide a welcome excuse for who and what to blame for the destruction of European industry that has been going on for several years - or several years before the US tariffs were imposed on Europe. It is similar to the way that high energy prices were justified by the war in Ukraine, which, of course, did not help them one bit, but was just the last straw, as prices were already rising long before it started and the energy industry had warned of these price rises.
In any case, Europe's response is more of a power response, in a situation where it is pulling the short end of the rope. In particular, Germany and France, according to agency sources, are pushing for an aggressive response in the form of a similarly significant increase in European tariffs on US goods. The effect of such a response can be compared economically to sanctions against Russia: sanctions hurt Russia, but they hurt Europe many times more. And tariffs on US goods would also hurt the United States, but they would hurt Europe, or European consumers, more, especially because they would be added to the already increased price levels caused by European green and ESG policies. Europe is already very protective. And despite the name - 'protectionism' - the consequence of these policies is to increase prices for consumers. It is therefore the opposite of consumer protection. Paradoxically, protection for companies is also not the case in the whole context, even if it is meant to be, because companies are being wiped out by other regulatory requirements, as we see in the declining European performance.
The losers in the tariff war are both the US and Europe, but Europe is losing more, so it's no surprise that the euro has strengthened by more than 2.2 % against the dollar to 1.11, heading for its biggest one-day gain since 2015. The koruna is also doing well, strengthening by 1.9 % on the pair with the dollar, below the level of 22.5 CZK/USD. We can expect the koruna to be more inclined to weaken in the days to come, because the price announcements have hit the stock markets quite negatively, which is indirectly feeding through to the FX market.
We can get an idea of what the concrete macroeconomic effects of the tariff war will be from the immediate reaction of the car companies. For example, the Volkswagen car group will fully reflect the new 25% tariff on car imports to the United States in its prices. Nothing else could have been expected in a situation where, in the long term, the margins of car manufacturers in Europe are falling because of the constant pressure on electromobility. When you have minimal margins, you have no room for price manoeuvre and you have to reflect the duty 100% in your prices. That is why the impact on Europe is more crushing than in many other countries. In addition, Volkswagen has temporarily suspended deliveries of vehicles from Mexico by rail and is holding cars imported by ship from Europe at the port. It cannot be ruled out that these cars will still be diverted to other parts of the world. But this, of course, will also add to the Group's costs. This template can be applied to any other company in the automotive sector and in other sectors affected by the tariffs. The result will be stagflation in both the US and Europe - a combination of inflation and economic slowdown.
Stocks, of course, react strongly to this. In particular, the shares of American technology companies and retail chains, which also rely on the labour of Asian workers, are going down. No wonder, since China will now be subject to an additional 34% tariff, on top of the 20% tariff already in place. The United States has imposed a so-called reciprocal tariff of 32 per cent on Taiwan. And Vietnam and India, which have become important manufacturing hubs for technology companies like Microsoft, Apple and others, will face duties of 46 and 26 percent respectively. Logically, therefore, the stocks of Hi-Tech companies are among the hardest hit. But at the same time, these stocks have also been the most inflated in price.
Recall, as we have said several times in this space, that the big seven US technology companies essentially set the direction of US stock indices. They therefore have the most to fall. Trump's announcement of tariffs has become the pin that pricks this price bubble. The NASDAQ technology index fell four per cent after the close of trading on Wednesday and after the announcement of the wave of tariffs. Apple shares are losing seven per cent and Amazon shares five per cent ahead of today's open. US retail chain Walmart is writing off nearly six percent. And I believe these sell-offs will continue. It's not time to buy stocks yet.
Markéta Šichtařová
nextfinance s. r. o.
gnews.cz-jav
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