Who will suffer most from US tariffs? Not China or the EU!

Have you noticed that Chinese and European stock indices have easily outperformed US counterparts since the start of 2025 (according to MSCI indices)? They have also at least held their own since the US election, with German stocks outperforming since then (by quite some margin). This seems at odds with concerns about the potential impact of US tariffs.  

German stocks may have been helped by the prospect of new coalition leadership after the 23 February election, and what that could mean for the lifting of the federal debt brake. This may seem ever more urgent in light of US plans for Ukraine and what it implies for European defence spending and the need for a broader and deeper European military industrial complex. 

More broadly, the apparent complacency of European and Chinese stocks in the face of tariff threats may reflect the fact that their goods trade surpluses with the US are not that important. Though large in absolute terms ($295bn in 2024 for China and $236bn for the EU), those surpluses are small compared to the size of their economies (1.6% and 1.2% of their respective GDPs). The chart shows that other economies are far more at risk, with the surpluses of Vietnam and Cambodia amounting to 26% of their respective GDPs. It may surprise many to see that Ireland has the fourth largest national surplus with the US (whether we compare to GDP or not). The chart also shows those countries that have the largest deficits with the US and that could hope to gain from "fairer" trade.

Such an analysis has a number of drawbacks. First, it assumes that tariffs will be applied equally to all goods and to all trading partners. Second, it ignores the fact that much of the surplus enjoyed by countries such as Vietnam exists because foreign companies use it as a production base (US and Chinese companies, say). Third, it ignores trade in services (as does the US administration, probably because it has a surplus in services), which is important for countries such as Ireland and Switzerland, for whom the goods surplus with the US is largely balanced by the services deficit. Fourth, it ignores the effect of retaliation and second round effects such as the diversion of trade flows.

Finally, it works on the premise that trade imbalances are due to unfair trade practices and can be reduced by tariffs and other trade restrictions (both of which I think are dubious assumptions). From a macroeconomic perspective, a current account imbalance reflects the gap between national savings and investment (for instance, the US invests as much as the EU as a share of GDP but saves a lot less). On this basis, the road to balance of payments equilibrium for the US will likely involve a rise in savings and/or a reduction in investment (and therefore a smaller economy, but don't say that too loudly). There isn't a lot that other countries can do to help with that.