00:00And for more on these tariffs, I can welcome Maxime Darmont, who is a senior economist for the United States, France and United Kingdom with the Allianz Group.
00:09Good morning, Maxime, and thank you for joining us.
00:12Donald Trump is claiming victory with these tariffs. Can they in reality be considered a victory for anyone?
00:22No, I think everyone tends to lose from tariffs. So the first impact in the economy will be obviously the US, right?
00:29We are already seeing in the US companies squeezing their margins to absorb the cost of tariffs.
00:37So for now, they are not really passing on the cost onto the consumer yet.
00:41They have decided to really take the hit on the margins, which is true, has been pretty high over the past couple of years.
00:48US margins, US corporate margins, pretty high.
00:51But I think very soon we're going to see really sharp price increases in the US.
00:56So the US consumers are going to start to pay the cost of tariffs.
01:00Why? Because now businesses have more certainty over the level of tariffs.
01:06We know it's going to be 15% on the EU, 15% on Japan, pretty much 25, 50% price on India.
01:14It's not entirely clear.
01:15So now that we have more certainty on the level of tariffs, I think it's time now for companies to start to pass on the cost onto the consumer.
01:26So the US clearly is the first impact on the economy.
01:29But also here in Europe and in the rest of the world, again, everybody wants things to lose.
01:34In Europe, what's going to happen?
01:36I think in the next couple of months, next couple of quarters, we're going to see export losses.
01:40So a decline of exports towards the US, which is a really huge market for many countries, including Germany.
01:47And I'm not even speaking of the likes of Ireland, Netherlands, even France to some extent.
01:52So we're going to see a decline of exports in countries in Europe, which have already very low growth.
01:58So it's really a big blow for many nations, especially in Europe.
02:02Last but not least, you have a lot of Chinese goods now, which are no longer exported to the US because basically tariffs on Chinese products are super high, super steep.
02:15So we're seeing a collapse in trade flows from China to the United States.
02:20But we can be concerned that part of this flow is going to, you know, find its way in other markets.
02:25So the Chinese are going to start to basically send their shipments, basically the goods they have not been able to sell to the US, send to Europe.
02:35So we could see a flooding of Chinese, cheap Chinese exports into third markets, not only in Europe, but also in other emerging markets in Africa, in India, and so on and so forth.
02:46So lots of people are going to lose from this trade war.
02:49And one of the main aims of tariffs for Trump is to force US and also foreign companies to reshore, i.e. moving manufacturing and possibly services back to the United States.
03:03How effective is this likely to be?
03:07I'm very sceptical to this. I'm very sceptical it's going to work.
03:10First of all, in three, four year time, President Trump will be gone.
03:14And, you know, businesses, when they make decisions, they look ahead, they plan ahead.
03:20So, OK, in five year time, maybe the tariffs are going to go back down.
03:24So why would I invest in the US? What I would reshore in the US?
03:28So this is the first argument.
03:32Second argument, even though we've got super high tariffs on low-cost manufacturing hubs, such as Vietnam, such as Malaysia, India, and so on,
03:42it remains, it remains advantageous to produce in these countries.
03:47You're never going to produce low-value goods, textile, household appliances, for instance.
03:53You're never going to produce them in the US. There's no way.
03:56The cost advantage remains really, really much, much higher if you produce in Vietnam.
04:01Labor costs in Vietnam is only 5% of US labor costs.
04:05So even if you get a 40%, 30% tariff, it still remains, you know, more advantageous for a company to produce in Vietnam and to export your goods to the US, right?
04:16So although we could say maybe a couple of sectors, we could see some resharing.
04:22I think of pharmaceuticals, automotives, and perhaps semiconductors.
04:29So on these products, tariffs are super high.
04:32They tend to be produced by countries which have more or less the same level of development than the US, such as European countries, Japan.
04:41So it could be the case that we're going to see some resharing.
04:44So some companies are starting to increase production for these specific products into the United States at the expense of Europe, Japan, and Korea, potentially.
04:56But overall, I don't think we're going to see massive resharing.
05:00And the last argument, why I'm very skeptical about the potential for resharing in the United States is the lack of labor.
05:08You've got massive labor shortages in the US.
05:10You've got massive skis shortages in the US.
05:13I don't see how they're going to find all these people, all these skills to produce the goods that they're importing.
05:21Now, some of Trump's tariffs have not been particularly surgical.
05:26They affect, for instance, raw materials, commodities, and parts, as well as actual finished products themselves,
05:35which means that even companies that do produce in the United States are affected by the tariffs.
05:40What are the particular products that consumers might actually forego in the event of price rises?
05:50Because certain things, obviously, people can't afford to forego.
05:54But there obviously will be some things that will obviously see sales drop.
05:59Yes, it's a good point.
06:03Probably textile, you know.
06:06So all the stuff which is not necessary for the – I mean, you can really reduce or cut down your expenses.
06:12Maybe a bit lower or less cars.
06:14I expect the car sales to drop in the US because all the Korean-made, Japanese-made, European-made, UK-made cars,
06:22you know, the cost is going to be much, much higher from now on.
06:25To some extent, also, household appliances is going to – we're going to see, I think, a drop in volumes to some extent.
06:32But there's only so much consumers are going to cut down.
06:38The price is going to be higher, for sure.
06:39The volumes are going to be lower.
06:41But for companies, as you said quite rightly, the cost of inputs is much higher now.
06:47Let's say you want to produce a factory in the US.
06:49That's great.
06:50You want to insure into the US.
06:51The thing is steel and aluminum, which are two key inputs to build a factory,
06:57the cost is much higher in the US than in the rest of the world.
06:59But in the labor, wages are super high in the US.
07:03So, it's not going to be very, very super cost advantageous to produce there.
07:08So, yeah, we could see really a reshaping of consumption patterns, I would say.
07:16Now, the US economy is holding up for now, as you said earlier, despite the warnings of many economists.
07:23Now, there may be a delayed effect.
07:26And you imagine that if prices go up, so will inflation.
07:29Yeah, so the two things.
07:32The US economy has been holding up in the first semester of 2025.
07:37That's true.
07:37But we are really seeing things cracking down a little bit, right?
07:42So, investment is starting to soften quite noticeably.
07:48Consumers spending as well.
07:49So, under the surplus, clearly the US economy is slowing down.
07:53And we expect growth of 1.6% this year, which is very low for US standards.
07:59Last year, the US economy was growing 2.8%.
08:02So, this is really a step down in terms of growth.
08:07And as you said, we haven't seen the price effect of the tariff yet.
08:12It is too soon.
08:13For now, as I was saying, US-based companies and US retailers have been squeezing onto their margins.
08:22So, they have been absorbing the cost of tariffs into the margins because they were not really certain about the set level of tariffs.
08:31But now that we know pretty much what's going to happen, but we know pretty much how much tariff we are going to pay for the next three or four years, now they are going to start to pass on the price into the consumer.
08:43So, I think by the end of this year, US consumer prices, US inflation is going to pick up from currently 2.7% to close to 4%.
08:53So, quite a shock.
08:55The consumer is going to fit the pinch.
08:58And obviously, what it means for the economy is going to mean lower consumer spending.
09:02And in the US, you know, consumer spending is about 70% to 80% of GDP.
09:06So, this is a bulk of GDP consumer spending.
09:09So, clearly, I think the second semester of 25 and the first semester of 26 are going to be pretty harsh for the US economy.
09:16It's going to be super low growth.
09:18And we cannot roll out also the risk of a recession.
09:21This is not our baseline.
09:23We think there are still a lot of resilience and good from downtown in the US.
09:28You know, it remains a massive ups for technology and so on and so forth.
09:32But nevertheless, risks are clearly to the downsides and growth is going to be very soft, I think, for the next couple of quarters, perhaps between 0.5% and 1.5% annualized.
09:44So, this is very, very soft for US standards and really, really softer than what we used to have over the past four or five years, where growth was, you know, hovering between 2.5% and 3% per year.
09:57Thank you very much for that, Maxine Darmont, Senior Economist with the Allianz Group.
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