The best that can be said for the EU-US trade deal agreed last Sunday -- at least from a European perspective -- is that it could have been a lot worse, reports Bloomberg.
After all, the 15 per cent tariff that America will now charge on almost all European imports is half the 30 per cent tariff that Donald Trump had threatened to impose from Aug. 1. It is also no higher than the baseline tariffs that the US president is imposing on many other trading partners, so the European Union will suffer little competitive disadvantage. Sure, the new taxes are a blow, but at least this draws a line under the uncertainty that has hung over transatlantic trade so far this year. “We are creating more predictability for our businesses,” said European Commission President Ursula von der Leyen. “This is necessary for our companies to plan and invest.”
Yet there is no hiding that this was a thoroughly bad deal for the EU. When the UK agreed to a 10 per cent tariff, Brussels insisted it would never accept such humiliating terms. Now the EU has failed to negotiate even this. Goldman Sachs says the hit to the eurozone economy from the deal will be around 0.4 percentage points of GDP by the end of 2026. But more importantly, the deal marks a watershed in US-EU relations that is likely to have consequences that reverberate long after the tariffs have come into effect.
The deal brings to a halt 80 years of progress towards lowering transatlantic barriers to trade and deepening economic ties. Those efforts had begun in the wake of the Second World War as Europe and the US sought to unwind the damage wrought by America’s calamitous experiment with protectionism in the 1920s and 1930s which, thanks to the Smoot-Hawley Tariff Act of 1930, had raised average US tariffs to 24 per cent. The response was the 1947 General Agreement on Tariffs and Trade (GATT), a US and European-led initiative to establish a new rules-based global system. Over the following decades, new countries joined, tariffs tumbled and GATT was transformed into the World Trade Organisation (WTO). Meanwhile, Europeans established the European Economic Community, later to become the EU, not to “screw” America as Trump claims, but as part of a US-encouraged embrace of free trade.
Surrender
The high point in EU-US trade relations came in 2013 with the launch of negotiations to establish a Transatlantic Trade and Investment Partnership (TTIP). This would have been the most ambitious free trade deal the world had ever seen, designed to remove non-tariff barriers to trade in areas such as food standards, financial services, pharmaceuticals and government procurement. TTIP foundered in the wake of Brexit, Trump’s arrival in the White House and the reluctance on both sides to give up regulatory autonomy over sensitive sectors such as finance and agriculture. But transatlantic efforts to pursue more limited trade liberalization continued. Under the Biden administration, for example, the EU and US established a Trade and Technology Council to work together on trade-related issues and to deepen transatlantic change.
Few could then have imagined the surrender the EU agreed to on Sunday. Average US tariffs on EU imports are set to rise from 1.5 per cent on the day that Trump was elected to around 16 per cent, according to Goldman Sachs. At the same time, the deal would appear to dash any lingering hopes of bringing down those non-tariff barriers that have been such a long-standing source of friction. The EU’s one negotiating success was to stand firm against Trump’s bullying demands for a rewrite of European rules on agriculture and digital services -- ironically changes here were what many US businesses wanted from a trade deal above all else. Instead they face the worst of both worlds: higher taxes on imports and no enhanced market access.
History suggests it could be years if not decades before the pendulum swings back towards free trade. Trump is already boasting about the increased revenues from tariffs, up fourfold in May, which the administration hopes will go a long way toward closing the estimated $3.4 trillion deficit identified by the Congressional Budget Office. Just as the Biden administration never reversed Trump’s first term tariffs, it is hard to imagine Trump or any other administration reversing the new ones.
On the other hand, the key difference between now and the 1930s is that the Europeans have chosen not to retaliate against Trump’s tariffs, thereby avoiding a repeat of the destructive trade wars of that earlier period. But that largely reflects deep divisions among EU members over whether and how to retaliate amid doubts that the EU could win a trade war, rather than any attachment to economic orthodoxy.
Damaged confidence
The orthodox response to higher US tariffs would be for the EU to seek to lower barriers to trade elsewhere, both with the rest of the world and within its own market. Indeed, von der Leyen emphasized this in her statement after the trade deal was sealed, citing in particular the EU’s recent agreements with the South American members of the Mercosur bloc, Mexico and Indonesia, as well as efforts to boost EU competitiveness in line with the recommendations of last year’s reports by former Italian prime ministers Mario Draghi and Enrico Letta.
But the danger is the EU’s apparent capitulation to Trump has damaged confidence in Brussels in ways that could undermine support for free trade and deeper European integration within the bloc. Already Europe’s right-wing populist parties are pointing to the deal as evidence that the EU is unable to defend national interests. French far-right leader Marine Le Pen slammed the agreement as a “political, economic and moral fiasco” that showed national sovereignty is being crushed “under the weight of Brussels bureaucracy.” Alice Weidel, co-leader of Germany’s far-right AfD party, called the deal an “admission of failure for the EU,” while Hungarian Prime Minister Viktor Orban said that Trump had “eaten von der Leyen for breakfast.”
At the same time, there are growing calls within the EU for protection of industrial sectors that expect to be hit as Trump’s tariffs divert trade from elsewhere. The EU has already introduced tariffs on Chinese car imports. Now European steelmakers are demanding protection from a likely wave of cheap imports as a result of America’s 50 per cent tariff on steel imports. While consumers will benefit from lower prices in the short term, any sense that the disruption to global trade is harming European businesses could make calls for protection harder to resist.
Meanwhile, the notion that the EU is a pushover weakens its hand in future negotiations too. An EU-China summit this month failed to make any headway in resolving trade-related disputes, in part because Beijing was unwilling to make concessions to an EU that lacks leverage. Only a few weeks ago, European Central Bank president Christine Lagarde was talking up the potential of a “global euro” moment. But the perception that the EU is unable to effectively defend its own interests undermines its pretensions as a geopolitical actor which is key to a bigger global role for the European currency.
The tariff deal ended a period of near-term uncertainty, as von der Leyen claims. But further out, the EU looks more prone to damaging protectionism and the threat from internal critics, with weaker bargaining power on the global stage. The sting of Europe’s humiliation may linger long after the shock of tariffs fades.
