US tariff uncertainty looms larger than direct impact on Malta

US-imposed tariffs have driven economic uncertainty through the roof, though several top economists agree that the direct impact on Malta may be minimal.

Last week, Donald Trump announced an unprecedented 20% tariff on goods imported from the EU, sending stock markets tumbling and prompting several economic experts to warn of a potentially catastrophic fallout across Europe.

However, several local economists say the impact on Malta’s economy is difficult to gauge.

“Tariffs are a tax on imports,” economist Lino Briguglio explains, with US operators now forced to pay an extra 20% on items imported from Europe.

“The first to suffer will be US consumers, as the costs are likely to be passed on to them,” he says.

“Malta does not export much to the US, so we won’t be among the most to face consequences,” he adds.

Lino Briguglio.

Some industries exempt from tariffs

Economist JP Fabri agrees, although he warns that some local industries could bear the brunt of tariffs.

In 2024, Malta exported some €272.5m worth of goods to the US, more than double the previous year, according to official data. This January alone, Malta sent almost €11m in goods across the Atlantic.

Experts say that most of these exports are either pharmaceuticals or semi-conductors. One index estimates that almost 40% of Malta’s exports to the US throughout 2023 were microchips, with a further 15% being pharmaceuticals or other chemical products.

To date, both the pharmaceutical and semi-conductor industries appear to have been spared, as their products fall within a narrow list exempt from tariffs. But the White House has warned that this could change in the future.

These exemptions could drastically change how Maltese industries experience the tariffs. A report published by the Financial Times last week estimated that once exemptions are taken into account, Malta’s tariff is likely to effectively settle around the 8% mark, rather than the announced 20%, simply because many of Malta’s exported goods are exempt.

“If the US imposes tariffs on European pharmaceutical products, Malta’s thriving pharmaceutical industry could suffer,” Fabri says. The same could be said of the semi-conductor industry, he warns.

JP Fabri.

What if the EU imposes its own tariffs?

And with the EU promising a strong response, things could get even messier, Fabri says. Malta imports more from the US (€342.2m in 2024 alone) than it exports, with a trade deficit of almost €70m last year. If the EU decides to impose retaliatory tariffs, Maltese consumers could end up paying more for products shipped from the US.

“The broader impact of tariffs hinges on EU-wide retaliation,” Fabri says, pointing out that the EU’s Common External Tariff measures mean that Malta will have to follow Brussels’ lead on the issue.

Even if Malta successfully dodges the direct impact of tariffs, it may be hit by the secondary impacts.

“Many small countries in Europe depend on exports, including tourism, because of their small domestic markets,” Briguglio says, arguing that they are the most likely to suffer if the tariffs lead to a slowdown in trade.

“Malta sells roughly 60% of its products abroad, with the remaining 40% sold locally,” he says. In short, foreigners will buy less from Malta if there is a recession.

This is particularly true for Malta, which relies heavily on exporting services, says Gilmour Camilleri, chief economist at the Malta Fiscal Advisory Council.

“Roughly 85% of our exports are services, not goods,” Camilleri says. “Our economy is very open, so this kind of external shock will always have an indirect impact.”

But Camilleri provides a counter-argument: How will tariffs affect the dollar?

“If the US economy suffers and the dollar loses value, this could partly offset the tariffs.”

In practice, Camilleri suggests, if the dollar loses value it might still work out to be cheaper to trade with the US, despite the tariffs.

“Say you used to buy something in dollars which is the equivalent of €2. With a weaker dollar this could now cost €1.80, so it’s still relatively cheaper than it was before the tariffs,” he says to illustrate his point.

Gilmour Camilleri.

Uncertainty is the biggest problem

However, beyond the tariffs themselves, the bigger issue is the unpredictability of Trump’s threats and the resulting uncertainty.

“There’s more economic uncertainty today than there was during the COVID-19 pandemic or the Russian invasion of Ukraine,” Camilleri says, pointing to the Trade Policy Uncertainty Index, a measure that gauges uncertainty across world economies.

Jordan Portelli, chief investment officer at Calamatta Cuschieri has a similar take when it comes to the stock market.

The tariffs are unlikely to have a major impact on Malta’s stock market, he suggests, with historical trends showing it tends not to react too strongly to global market trends.

But local government bonds could be a different matter, he says, as they often “do represent a reflection of other European government bonds”.

But ultimately, “markets are mostly interested in the tit-for-tat between the world’s most powerful economies,” he says, adding that it is the “unpredictability of actions and tweaks” to the tariffs that pose the biggest headache.

“A company can adapt to tariffs. Somehow, unpredictability makes things trickier,” Portelli argues.

“If someone is looking to invest in Malta or grow their workforce, they might hold off until they know what will happen.”

Jordan Portelli.

We don’t need to go too far back in time to find parallels to today’s situation, Portelli says, pointing to Trump’s first term in office.

In September 2018, Trump had threatened to impose tariffs on China, sparking fears of a global trade war.

Just like today, the markets had taken a hit amid the ensuing uncertainty, spending several months in turmoil before settling in early 2019 and eventually recovering strongly.