AmCham's Pantelis Pantelides on the US tariff changes' potential impact on Cyprus

The US administration on 1 February decided to move forward with the implementation of 25% tariffs on Canada and Mexico and 10% on China.

However, in a surprising turn of events, President Donald Trump on 3 February announced a 30-day pause on the implementation of tariffs on Canada and Mexico. Why were the tariffs on Canada and Mexico paused?

Speaking to CBN, Pantelis Pantelides, Executive Director, American Chamber of Commerce in Cyprus (AmCham Cyprus) shared his view on the recent developments, noting, "Right from the outset, the decision to impose tariffs on Canada, China and Mexico sparked concerns and criticism, not only from the affected countries but also from the business community around the world, including within the US."

"It is characteristic that the US Chamber of Commerce in Washington, of which AmCham Cyprus is an accredited member, whilst acknowledging that President Trump is right to focus on major problems such as border security and the flow of illegal drugs, commented that his decision was unprecedented and would bring about severe economic repercussions for all three countries, raising in parallel prices for American families," Pantelides continued.

He went on to note, "Following intense negotiations, the tariffs were paused for thirty days based on commitments from both nations to enhance border security and curb the flow of illegal drugs, particularly fentanyl, into the United States. This decision provided a temporary relief, allowing for further negotiations and cooperation."

While the pause on tariffs for Canada and Mexico as you mentioned provided temporary relief, the threat of tariffs on the EU looms large. What is the potential economic impact of such a scenario?

The imposition of new tariffs by the United States on the European Union is anticipated to have significant economic repercussions, potentially igniting a trade war, since, as publicly stated by EU officials and EU leaders, there would be countermeasures, thereby exacerbating economic strain on both sides. This strain may manifest in reduced GDP growth and increased costs for both consumers and businesses, leading to inflationary pressures.

Moreover, several key industries within the European Union are likely to be adversely affected by tariffs and could face increased costs, diminished competitiveness in the U.S. with a possible decline in exports and an increase in US prices for imported goods, which could lead to job losses and an economic slowdown.

In addition, tariffs can disrupt international supply chains, increasing costs for businesses that rely on cross-border trade. The effect of this could be especially apparent in small and isolated nations such as Cyprus, where a comparatively large proportion of businesses rely on cross-border trade.

And I leave aside the fact that such a scenario could also lay the groundwork for protectionist policies being adopted more widely.

Overall, while the direct impact on the EU's GDP might initially be modest, the long-term broader economic consequences could be more severe, affecting specific industries, consumer prices and international trade relations.

That is why, AmCham Cyprus, in line with the position of the American Chamber of Commerce to the European Union (AmCham EU), opposes the introduction of tariffs, as we believe it would be hugely destabilising for the transatlantic economy and would possibly create a transatlantic tit-for-tat trade with a significant impact on global supply chains, with companies on both sides of the Atlantic likely to suffer.

However, there is also another major concern that lingers as to whether the US, now using tariffs as a tool to exert pressure in order to achieve its objectives as per the recent example of Mexico and Canada, will request that in order not to impose tariffs Europe should in turn increase tariffs on imports from China and/or increase their defence spending.

A hypothetical scenario, of course, which, undoubtedly, might lead us into unpredictable complications.

How about the impact on the diplomatic transatlantic relationship between the EU and the U.S?

The introduction of tariffs is expected to escalate political tensions and erode trust, thereby complicating diplomatic relations between the European Union and the United States. This heightened tension could also disrupt collaboration between the US and the EU on various global issues, including security, climate change and technology, making it even more difficult and challenging to address these concerns.

And as both economies could suffer from reduced trade, higher prices, inflationary pressures and disrupted supply chains, this economic strain could also lead to public dissatisfaction and political pressure on both sides to resolve the conflict.

Further, in a globalised world there will be other repercussions that transcend the pure transatlantic spectrum, with the broader implications being even more profound.

Like?

First of all, tariffs typically lead to higher prices for goods and services, causing inflationary pressures and reducing spending power worldwide.

There could also be a shift in global alliances as countries could realign their alliances based on economic interests. For instance, disruptions in the US-EU trade flow could create opportunities for companies from major economies like China, India or Japan to fill gaps in the market, particularly in industries where the EU might face shortages or increased costs due to tariffs.

In addition, emerging markets could gain more influence as the US and EU focus on their trade conflict and countries in Southeast Asia, Africa and Latin America could leverage on this to become more significant players in global trade.

At the same time, ongoing trade conflicts could complicate negotiations for global trade agreements, such as those under the World Trade Organization (WTO), leading to a more fragmented global trade system, whilst companies might also reconfigure their supply chains to avoid tariffs, leading to long-term changes in global trade patterns.

In parallel, financial markets could also become more volatile due to the uncertainty surrounding trade and economic policies, leading to fluctuations in stock prices, exchange rates and investment flows.

So, how can such a possibility be averted?

What is important to note is that currently European officials are reportedly preparing for the possibility of tariffs and in parallel are considering various strategies to mitigate the impact. These include negotiating with the U.S. to avoid the tariffs or implementing retaliatory measures if necessary, underscoring the EU's commitment to defending its economic interests while striving to maintain a stable and cooperative transatlantic relationship.

The overarching sentiment within Europe is that cooperation and dialogue are essential to avoid escalating tensions so as to reach mutually beneficial solutions. The coming weeks will be crucial as negotiations continue and both sides seek to find a solution that avoids further escalation of trade tensions.

AmCham Cyprus believes that imposing tariffs or entering a trade conflict is not the way to foster economic growth or resilience. Instead, governments should seek to build the resilience of their supply chains through diversification and collaboration.

Moreover, at a time of global instability, the US should seek to collaborate rather than erode trust with one of its staunchest allies and the best way for the EU and the US to address common trade and security challenges is by working towards a pragmatic transatlantic agenda.

Will Cyprus be affected if the USA imposes tariffs on the EU?

While Cyprus' direct trade volume with the USA is relatively modest, Cyprus could face indirect effects due to its close economic ties the EU. In conjunction with the fact that a broader economic slowdown could lead to a decrease in global trade and economic activity, this, in turn, amongst others, could reduce demand for exports from Cyprus.

Furthermore, as mentioned, any disruptions in the supply chain and increased logistical costs could adversely affect the economy given that many Cypriot businesses largely depend on imports.

Additionally, the repercussions of a tariff imposition could extend to the services sector, which is a significant component of Cyprus' economy. The potential for reduced investment and tourism flows if businesses and consumers reduce spending due to concerns about the economic outlook, as well as the heightened costs for imported goods and the effect on reduced exports from Cyprus, could negatively affect our economy.

In conclusion, while Cyprus may largely escape direct damage, the broader economic context and potential ripple effects from the EU's response could pose significant challenges.