Trump 2.0: Impact of potential tariffs on the Portuguese economy activity

After the 2008 financial crisis, international trade lost momentum. According to the World Bank, trade as a share of global GDP grew from 41% in 1996 to 60% in 2008, stabilizing since then (Chart 1). In part, “slowbalization” is due to the maturation of global production and distribution chains, which resulted in a decline of the elasticity of international trade relative to income. This phenomenon has been exacerbated by the weakening of political support for free trade, amidst growing geopolitical tensions and the introduction of new protectionist policies (Table 1).

 

Chart 1 – Degree of openness, global economy, % of GDP

 

 

Source: from 1870 to 1949, Klasing and Milionis (2014); 1950 to 2018, Penn World Table; 2019 to 2023, World Bank (WDI).

 

Table 1 – Tariff announcements by the US Administration

 

 

Source: European Commission, Financial Times. Note: full list can be found here.

 

Protectionist policies can take different forms. They may affect price levels (tariffs) or transaction volumes (quotas or bans); they may also consist of non-tariff barriers, such as granting subsidies and state aid to national companies, favoring them in public procurement, or introducing regulatory requirements (such as mandatory local production). By discouraging transactions that would otherwise occur, trade barriers tend to reduce economic efficiency. Still, economic theory acknowledges that this inefficiency may be offset by gains derived from limiting market power concentration or enhancing economic security, as examples. Table 2 summarizes the results of simulations published by leading institutions regarding the expected impact on economic activity of the recent trade policies implemented/announced by the new U.S. administration.

 

Table 2 – Impact simulations by leading institutions

 

 

Source: Bundesbank, IMF, UK NIESR, Kiel Institute, Intereconomics and OECD.

 

In general, the simulations suggest a negative and persistent impact on economic growth, greater for the U.S. than for the EU. The scenarios also include the possibility of retaliation. These economic impacts arise through various transmission channels, including trade volume, import and consumer prices, exchange rates, consumer and business confidence, and – over the long term – productivity.

 

In march 2025, the Bank of Portugal simulated the impact of a scenario considering an increase in tariffs on economic activity in Portugal, highlighting the significance of considering their negative effect on confidence^.[1] A 25 percentage point increase in U.S. tariffs on goods exported by the EU was simulated, accompanied by retaliation of equal magnitude. Moreover, an additional uncertainty shock was considered, negatively affecting consumption and investment. The overall impact of the shocks points to a cumulative  reduction in Portuguese GDP of 1.1% over three years.

 

Chart 2 – Gross value added, direct and indirect exposure to the U.S. (2022, % of GDP)

 

Source: Eurostat (FIGARO, 2022 input-output tables), CFP calculations.

 

Within the European context, Portugal is one of the Member States with lowest level of exposure to the U.S. economy, with 2.5% of GDP directly and indirectly exposed to final demand in the U.S. (Chart 2). Nevertheless, in gross terms, the U.S. is the fourth largest trading partner in goods exports and the fifth in services exports. In 2024, the U.S. accounted for 10% of services exports and 7% of goods exports, totaling €5.9 billion and €5.3 billion respectively. Pharmaceutical products (22%), liquid fuels (20%), rubber and related articles (7%), and electrical equipment and machinery (6%) are the most representative goods. In 2024, the U.S. accounted for 5.5% of the stock of foreign direct investment. According to Eurostat data for 2022, around 97,000 jobs (2% of overall employment) are directly or indirectly linked to exports to the U.S.

 

Although limited, dependence on the U.S. has increased in recent years (Chart 3). Between 2019 and 2024, this market contributed significantly to the increase in Portuguese exports, accounting for 18% of the growth in tourism-related exports, 14% of other services exports, and 12% of goods exports. The sectors with highest exposure to this market are arms and ammunition (71% of total exports directed to the U.S.), pharmaceutical products (35%), and liquid fuels (primarily heavy fuel oils derived from gasoline at Galp’s refinery in Sines), rubber, cork, and other textile products (between 16% and 20%) (Chart 4). Together, these represented €3.2 billion in gross export value. Additionally, both the goods and services trade balances are significantly positive, totaling €6.62 billion in 2024.

 

Chart 3 – Portuguese economic exposure to the U.S.

 

Economic exposure to U.S. market (% of total sector exports)

U.S. market contribution to exports gowth, since 2019

Source: Bank of Portugal, CFP calculations.

 

Despite being a small open economy, participation in the EU offers some protection against the fragmentation of the global economy. In fact, most of Portugal’s external trade flows occur within the single market, which aims to ensure the free movement of goods, services, capital, and people. As countries seek to strengthen their economic security and minimize the impact of uncertainty, trade with geopolitically closer partners becomes a priority (Amador et al., 2024). In a context of global realignment and reconfiguration of trade flows, Portugal’s geographic position may provide a comparative advantage.

 

Chart 4 – Exports to the U.S. (2024)

 

Weight of exports to the U.S. (% of total)

Change in weight of exports to the U.S. (from 2019, in p.p.)

Sectoral weight (% of total exports to the U.S.)

Fonte: UN Trade and Development, CFP calculations.

 

The outbreak of a trade war constitutes a downside risk for the Portuguese economy in the short term. The transmission of the economic effects of trade barriers occurs through multiple and complex channels. As such, available simulations are necessarily based on simplified assumptions. Therefore, there is a significant degree of uncertainty in those estimates.

 

Abstracting from general-equilibrium effects, pricing power and exchange-rate pass-through, the impact on economic growth will hinge on three interacting factors: the effective tariff increase (estimated at roughly 20 percentage points for the EU); domestic gross value added embodied in US final demand (Chart 2); and the price elasticity of US import demand, which empirical evidence places in a range of -0.5 to -1.0 (a simplifying assumption, as price elasticities differ by product category. For detailed estimates, see Cavallo et al. (2021) and Boer et al. (2024)). Together, these channels imply that the direct drag on GDP could reach about -0.5 per cent, before any confidence effects are taken into account.

 

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Date of last update: 16/04/2025