Trump's 25% tariff plan poses threat to Central Europe's growth: S&P

March 03, 2025 (MLN): U.S. President Donald Trump's proposal to impose 25% tariffs on imports from the European Union is likely to dent growth prospects in Central Europe, compounding existing fiscal challenges, S&P Global Ratings told Reuters.

Trump said last week his administration would soon announce the tariffs on goods from the EU, which the Republican leader said had been created to "screw" the United States.

The European Commission has said it would react "firmly and immediately" against barriers to free trade, as U.S. duties on imports from Canada and Mexico come into effect on Tuesday.

S&P Global, when asked about the potential impact of the tariffs, noted that Central and Eastern Europe’s direct trade exposure to the U.S. was limited.

However, it said growth prospects were likely to be affected through the German car sector, as Reuters reported.

"This is particularly the case with Czechia, Hungary, Slovakia, Slovenia and Romania," it said, adding that machinery and transport equipment exports to Germany accounted for more than a tenth of these countries' total exports.

Central European nations are among the EU's most trade-dependent economies, with exports accounting for 92% of output in Slovakia and 69% in the Czech Republic, according to 2023 Eurostat data.

Only Romania, with 39%, falls below the EU average.

Poland, Central Europe's largest economy, is seen as less exposed to weakness in Western Europe due to a lower reliance on car exports, a large internal market and the receipt of billions of euros of EU recovery funds.

Hungary's forint and the Czech crown fell past key levels and the zloty retreated from a 10-year high on Friday as the tariff threats weighed.

Capital Economics Emerging Europe analyst Nicholas Farr said a 25% U.S. tariff on EU imports would reduce growth in Central Europe by approximately 0.5% of gross domestic product on average.

This impact is larger than previously estimated in a more favorable tariff scenario.

That could dampen recovery in a region where growth slowed sharply as inflation surged following Russia's 2022 invasion of Ukraine, with weakness in major trading partner Germany adding to headwinds.

However, S&P Global stated that declining Chinese demand for German cars would likely have a greater impact on Central European growth than U.S. tariffs.

It pointed to Volkswagen, Mercedes, and BMW, noting that China sales made up about a third of their total, compared to 10-15% for the U.S.

"Weaker growth in CEE sovereigns could compound their existing fiscal challenges, which we have long highlighted as one of the key risks in the region," it said.

The European Commission launched a disciplinary procedure against seven EU members over their large fiscal deficits last year, including Hungary, Poland, and Slovakia.

Meanwhile, Romania's government is struggling with the largest shortfall in the bloc.

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