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The immediate impact of U.S. car tariffs on the euro area would be small even though escalating trade tensions could have grave consequences for the global economy, according to the European Central Bank.

A simulation by ECB researchers shows the region’s car industry would incur losses of 4 percent in the event of new import duties -- a dimension that would only have a limited effect on region’s economy given the relative size of the sector. The advantages the levies create for U.S. automakers would largely be offset by retaliatory measures affecting other parts of the economy, the study finds.

The prospect of car tariffs has dangled over the European Union since last year, when President Donald Trump claimed imports of foreign-manufactured vehicles would threaten national security -- the same argument used to justify levies on aluminum and steel. The conflict entered another round this month after the U.S. threatened to seek $11 billion in damages through duties on European goods to counter state aid to Airbus SE.

The ECB concludes that the consequences of the tariffs implemented last year “pose only modest adverse risk to the global and euro-area outlook.” Even in China the impact appears to have been confined to the targeted industries so far.

But things could still get ugly. An escalation of trade tensions, which ECB researchers define as a 10 percent increase in U.S. tariffs on all trading partners, would lower activity in the world’s largest economy by 1.5 percent, with additional negative impact from heightened financial stress.

While the euro area would suffer only a modest decline in momentum, global trade and activity could drop by more than 2.5 percent and 1 percent, respectively.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow

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