Breakingviews - EU's lopsided Trump trade deal will be short-lived

Reuters

5 hours ago

BERLIN, July 27 (Reuters Breakingviews) - European Union trade negotiators may promptly celebrate the success they have achieved by clinching a deal with Donald Trump. If so, the question should be: If that passes for success, what would failure have looked like?
Financial markets and European captains of industry will doubtless heave a sigh of relief at the agreement, announced on Sunday by the U.S. president and his European Commission counterpart Ursula von der Leyen. The continent's main exporters can base their investment and commercial plans on the 15% levy on U.S. imports accepted by the Commission. That's much lower than the 30% charge on European goods Trump had promised to impose on August 1 in the absence of a deal, which in turn was less than a previous 50% threat. Importantly, the rate applies to European cars, which join Japanese-made vehicles in escaping the 25% charge on U.S. auto imports, and to the continent's pharmaceuticals and semiconductors, which may have otherwise faced punitive sector-specific treatment. The deal also enables the Europeans to shelve counter-tariffs and other measures they had lined up. Some degree of uncertainty has at least been dispelled.
Nevertheless, the tariff level still amounts to capitulation by Brussels. It must be compared not to Trump's threats, but to the 1.47% average, opens new tab rate previously applied to European goods crossing the Atlantic. Only two months ago, several EU governments were warning, opens new tab that a 10% across-the-board charge, similar to what the UK had obtained, would be a red line that should trigger some form of response.
In addition to the added trade friction, the EU has also promised to import more energy – spending $250 billion a year on American oil and gas – and could invest some $600 billion stateside. That, at least, is Trump's interpretation of the deal. It's unclear whether these figures represent incremental amounts, or what time frame the president had in mind. Fuzzy as they are, these EU pledges at least do not look very binding.
Yet the vague agreement also suggests Sunday's announcement is unlikely to be the last word. Even at the lower rate, the tariffs will hurt the U.S. economy. They will either bring much-needed revenue — a source of pride for Treasury Secretary Scott Bessent – or shrink imports. But they cannot achieve both at the same time. And if EU businesses do crank up investment in the U.S., the resulting capital flows will be to the detriment of the trade balance. All this means the EU's trade surplus, opens new tab with the U.S., which reached 198 billion euros in goods last year, partly offset by a 109 billion euro deficit on services, may not shrink much in the coming years.
When the impulsive and unpredictable president can no longer deny the destructive impact of his tariffs, he will be tempted to yet again blame U.S. trade partners. It's puzzling that the EU, the world's largest, opens new tab trading power, has failed to grasp that the best way to fight bullying is to stand your ground.
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