Last week, Trump announced he would put 20 percent tariffs on all European exports from April 9 and 25 percent on vehicles. The president believes they will address "trading imbalances" and protect American jobs and manufacturing.

ERR asked the finance minister how tariffs will affect prices in Estonia.

"My strong wish is that we talk less about prices and more about income, because overall, life for Estonians has improved. Incomes are growing faster, speaking on average, and prices are also just something average, statistical," Ligi replied.

He said it is currently impossible to calculate the effect of Trump's tariffs on prices in Estonia as too much is unknown. 

General calculations have been made estimating that the universal impact of tariff rates on economic growth is minus half a percent, the minister told the show. "Now I'm hearing that maybe an even smaller number is being considered. That applies to Europe as a whole."

Ligi acknowledged that, based on economic theory, smaller countries with open economies, like Estonia, suffer more from such tariffs than larger ones.

"Still, it is true that the U.S. is far away, but we feel the effects through our trading partners. Sweden, Germany, Finland, this is the export route through which we are affected," the minister said.

Ligi said the argument for tariffs is not "logical".

"If the U.S. looked at its trade deficit and then calculated a tariff from that, that is just so childish and so distorted that it really cannot last long. Because if you do not have production yourself, then there is no benefit to imposing a tariff, at least not in the short term. Redirecting the economy takes years, and even then, it is done very indirectly. In the end, you get an economy that is actually less productive, one that was deliberately relocated elsewhere in the first place," the finance minister said.

He said the U.S. can afford a big trade deficit because it can very profitably sell services to the world and attract capital flows. 

While he cannot imagine the tariff regime lasting, he added: "At the same time, it is easy to imagine this kind of moodiness and fighting continuing for a long time."

Public sector workers should not expect big pay rises

Ligi said "some key points" of next year's budget have been agreed already. However, coalition negotiations between Reform and Eesti 200 are ongoing, so more work needs to be done.

"We're dropping various taxes and replacing them with a permanent 24 percent tax rate on both income and value-added tax. Of course, the tax hump will disappear next year. That means the overall tax burden will noticeably decrease," he said.

"The VAT increase had already been agreed upon last summer; now it will simply be permanent rather than temporary. In the new security situation, we need a lasting funding base for the sharp rise in defense spending."

The minister said the increase in defense spending must "not be utopian."

"We will not be able to use it rationally, and it will not be sustainable. If there's a political battle going on where we oppose taxes and support defense spending at the same time, that's not possible. Overspending on defense is unreasonable, security experts say so as well," he stressed.

Last week, the Baltic finance ministers held a meeting, and Ligi said the ministers' message is to develop defense capabilities consistently.

"Not with big jumps, like stocking warehouses full and then figuring out later whether we've managed all the training and everything else," he told Vikkerradio.

"The big picture is to focus on that 5 percent and the budget rules that Europe is loosening, as well as general structural reforms and cutting state spending in other areas," Ligi said. "So when it comes to dreams of pay raises, I'd recommend being very restrained — the disappointment could be very great. But of course, we will do our best."

The minister said the state budget is in a very bad state.

"This has been in our enemy's interest, that the West, Europe, pays more and weakens itself in the process. But we have to do it in a balanced, sustainable, and collective way. Europe's defense capability ultimately depends on how Europe acts overall," he said.

"There is some kind of meeting every week where this is discussed. I spoke with the Spanish minister on Friday, and he has his own initiative on this. The European Commission has an idea about freer use of EU funds or structural instruments; then there are intergovernmental banks like the European Investment Bank. So in any case, there's a very large redirection of financial flows underway, though unfortunately not necessarily for civilian purposes," he added.

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