The foreign response to recent shifts in US trade policy emphasises that tariff retaliation is an inextricable element of a less multilateral and more protectionist global trade order. While most of the retaliatory threats triggered during the 2025 trade disputes have been suspended following bilateral truces, these agreements are often incomplete and fragile. Consequently, the risk of tariff retaliation remains exceptionally high on the global trade policy agenda.

A burgeoning economic literature has documented the costs of increasing protectionism (Fajgelbaum et al. 2019, Amiti et al. 2019), including the distortionary effects of the 2018-2019 US-China trade war (Fajgelbaum et al. 2023, Iyoha et al. 2025). Researchers have also analysed the political economy motives behind retaliatory targeting (Fetzer and Schwarz 2021), its impact on US agricultural exports (Grant et al. 2021, Morgan et al. 2022), and the hypothetical macroeconomic fallout of different retaliation strategies (Gnocato et al. 2025).

However, one fundamental gap in the trade war literature remains: there is surprisingly scarce empirical evidence regarding the impact of tariff retaliation on the retaliating economies themselves. Understanding this impact requires looking beyond US data, because the structural design of retaliatory tariffs differs profoundly from unilateral US tariffs, and most retaliating economies rely much more on international trade but typically only retaliate against one of many trading partners at a time.

This scientific gap is particularly glaring for the EU, which compiled a sizable retaliation package against US tariffs in 2025, targeting about $110 billion in imports. To gauge whether a retaliation of this scope would spark domestic inflation requires a robust and data-driven empirical framework. In our recent research (Fisgin et al. 2026), we develop and apply this framework to assess the trade destruction and inflationary consequences of the EU’s 2018 retaliation package against US steel and aluminium tariffs. While the 2018 package was significantly smaller (targeting $3.3 billion of imports), it provides the test case to evaluate the potential effects of the 2025 proposal.

The design of the EU’s 2018 tariff retaliation

The US administration imposed tariff rates of 25% on steel and 10% on aluminium imports in March 2018. The EU’s initial exemption expired on 1 June 2018, and the duties hit approximately $7.5 billion worth of European exports. In response, the European Commission implemented a rebalancing package on 22 June 2018. The first stage of this package applied 10% and 25% ad-valorem duties on US imports valued at approximately $3.3 billion. The targeted products ranged from industrial materials like steel and aluminium to high-visibility consumer goods, including bourbon, motorcycles, playing cards, and apparel. The EU suspended its retaliatory tariffs after about 3.5 years, on 1 January 2022, following a joint EU-US statement in October 2021, which included a commitment to relinquishing the steel and aluminium tariffs as well as the retaliation.

The EU’s retaliation was fundamentally asymmetric to the triggering US tariffs. While the US tariffs exclusively targeted intermediate inputs, the EU distributed its tariffs across a wide variety of products, with final consumption goods and intermediate inputs each making up about half. This design was a deliberate attempt to avoid putting pressure on the input prices of domestic downstream industries and to curtail negative effects on European employment and economic activity.

Crucially, the EU systematically targeted goods with low US import dependence. Using a Herfindahl-Hirschman Index (HHI) to evaluate import-partner concentration across thousands of import product codes, we find that the vast majority of tariffed products were not at risk of supply chain disruptions. As shown in Figure 1, only a minuscule fraction of tariffed goods cleared the European Commission’s formal threshold for a ‘strategic vulnerability’ (HHI above 0.4 and import share above 50%). In the only two instances where reliance on a US supplier was exceptionally high — whiskey and playing cards — the EU still ensured that a wide array of alternative non-US suppliers was available, allowing European importers to efficiently substitute away from US exporters.

Figure 1 Herfindahl-Hirschman Index vs. US import share by tariff status

Note: The figure shows the relationship between the HHI (x-axis) and the US import share (y-axis) for US imports to the EU. Red dots denote products tariffed in the first stage of the 2018 retaliation package.
Source: Figure 1c from Fisgin et al. (2026).

Permanent scars on transatlantic trade

A central question in current policy debates is whether trade wars cause temporary market frictions or permanent global reallocations. Our empirical analysis provides clear evidence that retaliatory tariffs, even if they are expected to be temporary, lead to trade diversion hysteresis — or permanent ‘scarring’ effects. We find that import values of the targeted US products collapsed rapidly as they fell by about half starting in the second month after the implementation of the EU’s retaliatory tariffs. This sharp, sustained decline is clearly visible in the trade data and illustrated in Figure 2.

Figure 2 12-month proportional change in total import values

Note: ‘Untreated’ includes imports of all goods from all countries that do not face retaliatory tariffs. June 2018 is set as month zero as tariffs were effective from 22 June 2018. Import values are normalised to one in month zero so that import values are relative to the last month before the tariffs were implemented.
Source: Figure C2 from Fisgin et al. (2026).

We make an even more striking finding in the data after the retaliatory tariffs were officially suspended in January 2022. Our estimates show that the import demand response to the implementation of the tariffs was roughly twice as large as the response to their suspension. In other words, US import shares to the EU failed to recover to their pre-2018 levels and remained permanently depressed. A plausible reason for this asymmetry is that reconfiguring global supply chains entails high, irreversible sunk costs. Hence, European importers chose to maintain their newly established relationships with non-US suppliers rather than revert to their previous partners once the tariffs disappeared.

High tariff pass-through without inflationary pressures

Standard trade theory implies that the incidence of a tariff depends on the relative elasticities of supply and demand. If domestic demand is highly inelastic or substitution is difficult, tariffs are a direct tax on domestic businesses and consumers. When examining unit values in the trade data, we find that US exporters did not lower their pre-tariff prices to absorb the costs of the EU retaliation. Instead, as shown in Figure 3, the 12-month change in tariff-inclusive import prices climbed by 20 to 30 percentage points immediately following implementation. Hence, the retaliatory tariffs were rapidly and comprehensively passed through into the ‘at-the-dock’ import prices paid by European importers.

Figure 3 12-month proportional change in import prices

Note: ‘Untreated’ includes imports of all goods from all countries that do not face retaliatory tariffs. June 2018 is set as month 0 as tariffs were effective from 22 June 2018. The change in import prices is measured as the geometric mean of the 12-month tariff-inclusive unit value relative changes, weighted by the logarithmic mean of their import shares by value. Import prices are normalised so that zero represents a price change that equals its value before tariffs were implemented.
Source: Figure 2 from Fisgin et al. (2026). 

This finding mirrors the prevailing evidence on US tariff pass-through reported by, for example, Cavallo et al. (2021) and many others. Importantly, it demonstrates that even when tariffs target comparably small import values and products with low import dependence, they are still characterised by near-complete pass-through.

The high and immediate pass-through of the EU’s retaliation points to a critical concern: did the retaliation spark domestic consumer or producer inflation? To answer this question, we innovate upon existing data infrastructure by developing a granular concordance framework that maps highly disaggregated trade data to European consumer and producer price indices. This allows us to construct precise tariff exposure measures for the EU and for each of the 27 member states.

Examining the evolution of these measures, we find no evidence that the retaliatory tariffs generated domestic inflationary pressures. Across 31 producer price industries and 34 consumer price categories, the relationships between tariff exposure and price changes are statistically indistinguishable from zero. This holds true even when we employ an event-study framework to compare high-exposure product-country groups to low-exposure groups.

What explains this finding? We argue that, in addition to the design of the retaliation package, its small size was critical. When we compute the maximum hypothetical impact on the most exposed consumer products in the EU, we find that the retaliation would have only lifted the month-over-month growth rate of the consumer price index between June and July 2018 by an additional 0.02 percentage points — a negligible effect. Put differently, the retaliation was small enough to avoid upward pressures on EU domestic prices.

Conclusion

The absence of an inflationary spike due to the EU’s 2018 tariff retaliation was not a coincidence; it was the result of strategic policy design. By keeping the overall scope of the retaliation moderate, distributing the burden between intermediate inputs and final goods, and intentionally targeting products with high substitution elasticity, the European Commission successfully maximised external political pressure while insulating the EU economy from cost-push inflation.

As policymakers prepare for the possibility of renewed tariff escalations, our research provides a dual lesson. On the one hand, a retaliating economy can engineer a trade policy response that avoids domestic self-harm. On the other hand, deploying these protectionist tools — even temporarily — forces a reconfiguration of supply chains that leaves permanent, irreversible scars on bilateral trade.

Finally, ongoing research by Fleck and Pradhan (2026) indicates that the ‘inflation-immaculate retaliation’ cannot be scaled up indefinitely. In particular, the EU’s proposed 2025 retaliation package is two orders of magnitude larger than the 2018 retaliation. Thus, its implementation would come at a significantly higher risk of exposing European producers and consumers to price shocks.

References

Amiti, M, S Redding and D Weinstein (2019), “The Impact of the 2018 Tariffs on Prices and Welfare”, Journal of Economic Perspectives 33(4): 187-210.

Cavallo, A, G Gopinath, B Neiman and J Tang (2021), “Tariff Pass-Through at the Border and at the Store: Evidence from US Trade Policy”, American Economic Review: Insights 3(1): 19-34.

Fajgelbaum, P, P K Goldberg, P Kennedy and A Khandelwal (2019), “The return to protectionism”, VoxEU.org, 7 November.

Fajgelbaum, P, P K Goldberg, P Kennedy, A Khandelwal, and Taglioni (2023), “The ‘bystander effect’ of the US-China trade war”, VoxEU.org, 10 June.

Fetzer, T and C Schwarz (2021), “Tariffs and Politics: Evidence from Trump’s Trade Wars”, The Economic Journal 131(636): 1717-1741.

Fisgin, E, J Fleck and K Richards (2026), “The Design and Effect of Tariff Retaliation: Evidence from the European Union”, Board of Governors of the Federal Reserve System, International Finance Discussion Paper 1436.

Fleck, J and A Pradhan (2026), “The Distributional Effects of a US-EU Trade War”, Working Paper.

Gnocato, N, V Gunnella, C Montes-Galdon, T Schuler and G Stamato (2025), “Tariffs across the supply chain”, VoxEU.org, 30 May.

Grant, J, S Arita, C Emlinger, R Johansson and C Xie (2021), “Agricultural exports and retaliatory trade actions: An empirical assessment of the 2018/2019 trade conflict”, Applied Economic Perspectives and Policy 43(2): 619-640.

Iyoha, E, E Malesky, J Wen and S-J Wu (2025), “Exports in Disguise? Trade Rerouting During the US-China Trade War”, HBS Working Paper 24-072.

Morgan, S, S Arita, J Beckman, S Ahsan, D Russell, P Jarrell and B Kenner (2022), “The Economic Impacts of Retaliatory Tariffs on U.S. Agriculture”, Economic Research Report 304, US Department of Agriculture, Economic Research Service.