Shield the US from Imports! – GDP Impacts on Finland and Other European Union Member States

We analyze the value-added impacts of rising (United States) US protectionism on Finland and other European Union (EU) member states. The president of the US has proposed tariff increases, particularly on imports from Mexico and China to the US, while the threat of protectionism also involves more direct tariffs against EU exports to the US. We apply a measurement framework for the decomposition of value-added trade to the US grounded on hypothetical extraction, a mathematical technique based on an input-output representation of the global economy. Our results show that trade to the US continues to be an important source of the value added for Finland as well as the majority of the EU, even during the temporary slowdown of trade during the Great Recession. For many countries, trade to the US represents over 10% of the value added from exports to all countries. We find that a large majority of the value added for both Finland and the EU goes directly as intermediate or final goods and services to the US. Much less value added is generated via other countries through either their intermediate or direct final exports to the US. The other most important trade channel is through Germany. We investigate the effect of the trade barriers in several counterfactual scenarios. Using standard export elasticity estimates, we find that the value added generated by Finland and other EU countries through Mexico and China to the US would decline drastically if the US launched tariff rises on imports from Mexico and China to the US. The impacts would be significantly worse if the US raised tariff rates on direct imports from EU countries.