How the US-EU trade deal wards off more escalation but will raise prices and slow growth

Boston Globe

a day ago

Unresolved details:
Trump and von der Leyen's announcement, made during Trump's visit to one of his golf courses in Scotland, leaves many crucial details to be filled in.
The headline figure is a 15 percent tariff rate on about 70 percent of European goods brought into the United States, including cars, computer chips, and pharmaceuticals. It's lower than the 20 percent that Trump initially proposed, and lower than his threats of 50 percent and then 30 percent.
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The remaining 30 percent is still open to further decisions and negotiations.
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Von der Leyen said that the two sides agreed on zero tariffs on both sides for a range of 'strategic' goods: aircraft and aircraft parts, certain chemicals, semiconductor equipment, certain agricultural products, and some natural resources and critical raw materials. Specifics were lacking.
She said that the two sides 'would keep working' to add more products to the list.
Additionally, EU companies would purchase what Trump said was $750 billion worth of natural gas, oil, and nuclear fuel over three years to replace Russian energy supplies that Europe is seeking to exit in any case.
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Meanwhile, European companies would invest an additional $600 billion in the United States under a political commitment that isn't legally binding, officials said.
Not yet in writing:
Brussels and Washington will shortly issue a joint statement that frames the deal but isn't yet legally binding, according to senior officials who weren't authorized to be publicly named according to European Commission policy.
The joint statement will have 'some very precise commitments and others which will need to be spelled out in different ways,' a senior European Commission official said.
EU officials said that the zero tariff list would include nuts, pet food, dairy products, and seafood.
Steel tariff remains:
Trump said that the 50 percent US tariff on imported steel would remain. Von der Leyen said that the two sides agreed to further negotiations to fight a global steel glut, reduce tariffs, and establish import quotas — that is, set amounts that can be imported, often at a lower rate or tariff-free.
Trump said that pharmaceuticals, a major import from the EU to the United States, weren't included in the deal. Von der Leyen said that the pharmaceuticals issue was 'on a separate sheet of paper' from Sunday's deal.
And von der Leyen said that when it came to farm products, the EU side made clear that 'there were tariffs that could not be lowered,' without specifying which products.
'Best we could do':
The 15 percent rate removes Trump's threat of a 30 percent tariff. But it effectively raises the tariff on EU goods from 1.2 percent last year to 17 percent and would reduce the 27-nation's gross domestic product by 0.5 percent, said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.
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Higher tariffs, or import taxes, on European goods mean sellers in the United States would have to either increase prices for consumers — risking loss of market share — or swallow the added cost in terms of lower profits. The higher tariffs are expected to hurt export earnings for European firms and slow the economy.
Von der Leyen said that the 15 percent rate was 'the best we could do' and credited the deal with maintaining access to the US market, and providing 'stability and predictability for companies on both sides.'
Mixed reaction:
German Chancellor Friedrich Merz welcomed the deal which avoided 'an unnecessary escalation in trans-Atlantic trade relations' and said that 'we were able to preserve our core interests,' while adding that 'I would have very much wished for further relief in trans-Atlantic trade.'
Senior French officials on Monday criticized the accord. Strategy Commissioner Clément Beaune said that the deal failed to reflect the bloc's economic strength.
'This is an unequal and unbalanced agreement,' he said. 'Europe didn't wield its strength. We are the world's leading trading power.'
While the rate is lower than threatened, 'the big caveat to today's deal is that there is nothing on paper, yet,' said Carsten Brzeski, global chief of macro at ING bank.
'With this disclaimer in mind and at face value, the agreement would clearly bring an end to the uncertainty of recent months. An escalation of the US-EU trade tensions would have been a severe risk for the global economy,' Brzeski said.
'This risk seems to have been avoided.'
Car prices:
Asked if European carmakers could still profitably sell cars at 15 percent, von der Leyen said the rate was much lower than the current 27.5 percent. That has been the rate under Trump's 25 percent tariff on cars from all countries, plus the preexisting US car tariff of 2.5 percent.
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The impact is likely to be substantial on some companies, given that automaker Volkswagen said that it suffered a $1.5 billion hit to profits in the first half of the year from the higher tariffs.
Mercedes-Benz dealers in the United States have said they were holding the line on 2025 model year prices 'until further notice.' The German automaker has a partial tariff shield, because it makes 35 percent of the Mercedes-Benz vehicles sold in the United States in Tuscaloosa, Ala., but the company said that it expects prices to undergo 'significant increases' in coming years.
Trade gap:
Before Trump returned to office, the United States and the EU maintained generally low tariff levels in what is the largest bilateral trading relationship in the world, with around $2 trillion in annual trade.
Together the United States and the EU have 44 percent of the global economy. The US rate averaged 1.47 percent for European goods, while the EU has averaged 1.35 percent for American products, according to the Bruegel think tank in Brussels.
Trump has complained about the EU's $232.5 billion trade surplus in goods, which shows Americans buy more from European businesses than the other way around, and has said that the European market isn't open enough for US-made cars.
However, American companies fill some of the trade gap by outselling the EU when it comes to services such as cloud computing, travel bookings, and legal and financial services. And about 30 percent of European imports are from American-owned companies, according to the European Central Bank.
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