Latvia’s economic outlook is facing potential headwinds as former U.S. President Donald Trump threatens new tariffs on goods from European nations. The levies, reportedly linked to a dispute over Greenland, could impact Latvia’s trade adn growth, according to an analysis by Citadele bank chief economist Kārlis Purgailis. This article examines the potential scenarios and degree of economic impact on Latvia, ranging from stagnation to a milder slowdown, should these tariffs be implemented.
Kārlis Purgailis, bankas Citadele galvenais ekonomists
Latvia could see its economic growth slowed by new tariffs threatened by former U.S. President Donald Trump against European nations, according to an analysis by Citadele bank chief economist Kārlis Purgailis. The potential tariffs, linked to a dispute over Greenland, could have ripple effects far beyond the initially targeted countries.
Trump announced over the weekend that a 10% tariff would be imposed on all goods exported to the U.S. from European countries that do not support his stated intention to purchase Greenland, effective February 1. That rate could increase to 25% by June 1 and remain in place until a political agreement is reached for the full acquisition of Greenland.
The initial list of countries targeted by Trump includes Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands, and Finland.
While a 10% tariff might initially appear as a short-term negotiating tactic or a means of political pressure, these measures directly impact key trade and supply chain partners for Latvia. This could translate to slower export growth and economic expansion, reduced order volumes in industry, and a deceleration in labor market and wage increases.
Purgailis outlined three potential scenarios – negative, neutral, and comparatively positive – to assess the real consequences for Latvia should the 10% tariff take effect. Each scenario evaluates the impact on Latvia’s GDP growth, labor market stability, and wage dynamics.
The negative scenario assumes a 10% reduction in Latvian exports to the eight European countries, mirroring the tariff increase. This shock to those markets would reduce Latvia’s GDP growth by approximately 1.5 percentage points. Prior to Trump’s announcement, Latvia’s economy was projected to grow by around 2% this year, but this scenario would slow growth to approximately 0.5%. Essentially, Latvia’s economic growth would approach stagnation.
Slower growth would inevitably be reflected in the labor market. Instead of the projected 6.5% unemployment rate, it could rise to around 7.1%, creating greater uncertainty for workers and more cautious decision-making by employers. Consequently, wage growth would also slow – if an average wage increase of approximately 6.5% is currently forecast for 2026, the negative scenario could reduce that to around 5.6%.
However, even in this most drastic scenario, there would be no grounds for talk of a crisis, but rather a noticeable, albeit manageable, economic slowdown. Economic growth would slow, but it would not be a crisis.
The neutral scenario is based on a more moderate assumption that Latvian exports to the aforementioned countries would decrease by approximately 7.5%, rather than the full 10%. In other words, part of the impact of the tariffs would be absorbed by prices, profit margins, or alternative export markets. In this case, the impact on the economy would be milder, but still noticeable – Latvia’s GDP growth would decrease by approximately 1.1 percentage points, and instead of the previously forecast 2%, economic growth this year would reach around 0.9%.
In the labor market, this would mean not a sharp break, but a slow, yet noticeable cooling. The unemployment rate could rise to around 6.9%, while wage growth would slow to approximately 5.8%. Companies would become more cautious, but mass layoffs or a sharp decline in income would not be expected in this scenario.
The positive scenario, which currently appears most likely, is based on the assumption that Latvian exports to the aforementioned markets would decrease by approximately 5%, about half as much as the tariff itself. Practice in 2025 shows that the tariff burden is most often shared by both sides – part is borne by U.S. importers, part by European exporters, allowing them to avoid a sharp decline in trade volumes.
According to this scenario, Latvia’s economic growth would slow by approximately 0.7 percentage points and reach around 1.3% this year. The impact in the labor market would be even milder – the unemployment rate could rise to 6.8%, while wage growth would slow to approximately 6.1%. This would be more of a psychological pause than a structural problem for the economy.
Thus, the calculations provide a clear message – in any case, the new U.S. import tariffs would be a negative shock to the Latvian economy, but there is no reason to talk about a GDP decline or a crisis. Slower growth inevitably means a slightly higher unemployment rate and more modest wage growth, but even in these indicators, no dramatic breaks are observed.
At the same time, it is also important to take into account the political context of this situation. Tariffs have become a common negotiating tactic of the U.S. administration – strict announcements are usually followed by discussions, pressure on partners, and ultimately a retreat when tariffs are either fully canceled or significantly reduced. Therefore, it is very likely that this case will also be more of another negotiating episode than an escalation of a long-term trade war.
Comparing the potential impact of the new tariffs in the Baltic states, it is clear that Latvia would be the least affected, as it is relatively less dependent on exports to the aforementioned eight countries than Lithuania and Estonia. The greatest impact in the Baltics would be observed in Estonia – exports to Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands and Finland account for almost 21% of Estonia’s GDP, while in Lithuania and Latvia – 16% and 15% respectively. Accordingly, the impact of tariffs on Estonia’s economy would also be the greatest. For example, in the negative scenario, tariffs would reduce Estonia’s GDP growth by 2.1 percentage points, Lithuania’s – by 1.6 percentage points, and Latvia’s – by 1.5 percentage points.
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