EU reaches tariff deal with US to avert rift

The Star

2 days ago

EDINBURGH: The United States and European Union (EU) have agreed on a hard-fought deal that will see the bloc face 15% tariffs on most of its exports, including automobiles, staving off a trade war that could have delivered a hammer blow to the global economy.
The pact was concluded less than a week before a Friday deadline for US President Donald Trump's higher tariffs to take effect and was quickly praised by several European leaders, including German chancellor Friedrich Merz and Italian Prime Minister Giorgia Meloni, who called it 'sustainable.'
Trump and European Commission president Ursula von der Leyen announced the deal Sunday at his golf club in Turnberry, Scotland, although they didn't disclose the full details of the pact or release any written materials.
The 15% rates will take effect Aug 1, according to a US official.
'It's the biggest of all the deals,' Trump said, while von der Leyen added it would bring 'stability' and 'predictability.'
US equity futures climbed, with S&P 500 contracts rising 0.4% after the index notched its fifth-straight all-time high last Friday.
The deal would leave EU exports facing much higher tariffs than the bloc would charge for imports from the United States, with von der Leyen saying the aim is to rebalance a trade surplus with the United States.
But those kinds of tradeoffs in the agreement angered some European industry groups, with Germany's main lobby saying it 'sends a fatal signal to the closely intertwined economies on both sides of the Atlantic.'
Von der Leyen and Trump also differed on some of the key terms of the deal they announced. The US president said the tariff level would apply to 'automobiles and everything else,' but not pharmaceuticals and metals.
The chief of the EU's executive arm said later at a news conference that the 15% rate would be all inclusive, wouldn't stack on top of industry-specific tariffs and would cover drugs, chips and cars.
Metals duties 'will be cut and a quota system will be put in place,' she said.
'We have 15% for pharmaceuticals. Whatever the decision later on is, of the president of the United States, how to deal with pharmaceuticals in general globally, that's on a different sheet of paper,' von der Leyen said, adding that the overall rate 'is not to be underestimated but it was the best we could get.'
Senior US officials later said that the two sides agreed on a 15% tariff level for the EU's pharmaceutical exports.
A separate Section 232 probe on pharmaceuticals is still coming over the next three weeks, but the EU tariff level will remain at 15%, the officials added.
The EU agreed to purchase US$750bil in American energy products, invest US$600bil in the United States on top of existing expenditures, open up countries' markets to trade with the United States at zero tariffs and purchase 'vast amounts' of military equipment, Trump said.
Von der Leyen said no decisions have been made on European wine and spirits, but the matter would be sorted out soon.
Key to getting the 15% rate to apply to pharmaceuticals and semiconductors was the bloc's promise to make US investments, according to sources.
Ahead of the meeting, the EU was expecting a 15% charge on its imports to also apply to most pharmaceuticals. The products had been one of the negotiation's main sticking points.
Without a deal, Bloomberg Economics estimated that the total US average effective tariff rate would rise to nearly 18% on Aug 1 from 13.5% under current policies.
The new deal brings that number down to 16%.
The deal doesn't cover the EU's steel and aluminium exports, which will remain subject to 50% tariffs, according to senior US officials. Aerospace tariffs, meanwhile, will remain at 0% pending the outcome of a Section 232 probe, the officials added.
Officials had discussed terms for a quota system for steel and aluminium imports, which would face a lower import tax below a certain threshold and would be charged the regular 50% rate above it.
The EU had also been seeking quotas and a cap on future industry-specific tariffs.
For months, Trump has threatened most of the world with high tariffs with the goal of shrinking US trade deficits. But the prospect of those duties – and Trump's unpredictable nature – put world capitals on edge.
In May, he threatened to impose a 50% duty on nearly all EU goods, adding pressure that accelerated negotiations, before lowering that to 30%.
The transatlantic pact removes a major risk for markets and the global economy – a trade war involving US$1.7 trillion worth of cross-border commerce – even though it means European shipments to the United States are getting hit with a higher tax at the border.
The goals, Trump said, were more production in the United States and wider access for American exporters to the European market.
Von der Leyen acknowledged part of the drive behind the talks was a reordering of trade, but cast it as beneficial for both sides.
'The starting point was an imbalance,' von der Leyen said.
'We wanted to rebalance the trade we made, and we wanted to do it in a way that trade goes on between the two of us across the Atlantic, because the two biggest economies should have a good trade flow.'
The announcement capped off months of often tense shuttle diplomacy between Brussels and Washington.
The two sides appeared close to a deal earlier this month when Trump made his 30% threat.
The EU had prepared to put levies on about €100bil (US$117bil) – about a third of American exports to the bloc – if a deal wasn't reached and Trump followed through on his warning.
US and European negotiators had been zeroing in on an agreement this past week, and the decision for von der Leyen to meet Trump at his signature golf property brought the standoff to a dramatic conclusion.
The EU, for weeks, indicated a willingness to accept an unbalanced pact involving a reduced rate of around 15%, while seeking relief from levies on industries critical to the European economy.
The US president has also imposed 25% duties on cars and double that rate on steel and aluminium, as well as copper.
Several exporters in Asia, including Indonesia, the Philippines and Japan, have negotiated reciprocal rates between 15% and 20%, and the EU saw Japan's deal for 15% on autos as a breakthrough worth seeking as well.
Washington's talks also continue with Switzerland, South Korea and Taiwan.
Trump said he is 'looking at deals with three or four other countries' but 'for the most part' others with smaller economies or less significant trading relationships with the United States would receive letters simply setting tariff rates.
Trump had announced a range of tariffs on almost all US trading partners in April, declaring his intent to revive domestic manufacturing, help pay for a massive tax cut and address economic imbalances he has said are detrimental to US workers.
He put them on pause a week later when investors panicked. — Bloomberg