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CNBC
26 minutes ago
- CNBC
Why the U.S.-EU trade agreement is unlikely to derail Europe's defense boom
Europe's defense stocks wobbled at the start of the week, as investors pored over the details — still lacking in some areas — of the framework trade agreement struck by the U.S. and European Union on Sunday. An initial concern was that a commitment by the EU to increase its purchases of U.S. goods, in particular military equipment, could come at the cost of the European defense firms that have staged a massive rally this year on expectations of a regional spending spree . Those include France's Thales , which fell 4.3% on Monday; Germany's Renk and Rheinmetall , which were down 5.1% and 3.3%, respectively, and Italy's Leonardo , which dipped 0.74%. Analysts told CNBC such fears were unfounded, and that European defense firms were set to remain the primary beneficiary of bigger national budgets in the coming years — particuarly since they lack the output capacity to meet all the region's needs themselves. According to a White House summary of the deal, the EU would make $600 billion in new investments in the U.S. by the end of President Donald Trump's term in 2028, in addition to the $100 billion that EU firms currently invest annually. It adds that the bloc "agreed to purchase significant amounts of U.S. military equipment," with Trump telling reporters that it would make "hundreds of billions of dollars" of arms purchases. In its own read-out, the EU said only that companies in the bloc "have expressed interest in investing at least $600 billion" in "various sectors" in the U.S. by 2029, specifying instead its intention to buy 700 billion euros ($810 billion) worth of U.S. liquified natural gas, oil and nuclear energy products, and 40 billion euros worth of AI chips. European Commission President Ursula von der Leyen did not mention U.S. military purchases in her own statement on the deal , which comes two weeks after she put forward a proposed 2 trillion euro, seven-year budget including a fivefold increase from current spending on defense and space. Overall, the EU has this year outlined plans to mobilize around 800 million euros in new defense spending as part of a major rearmament push, including via loans and the relaxation of fiscal spending constraints. Lack of capacity The numbers mentioned in the trade agreement are a source of uncertainty, Peter Schaffrik, global macro strategist at RBC Capital Markets, told CNBC. "For defense in particular, this is relevant as we know that not all of the European spending can be done with European firms. Therefore, it is unclear whether the sums mentioned are in addition to what was planned, and whether the spending takes place over a short or long time frame (i.e. 10 years) is also highly uncertain." U.S. military suppliers such as Lockheed Martin , Northrop Grumman and Raytheon were already expected to significantly benefit from higher EU spending as they extend existing contracts and win new ones, despite calls by European bosses and leaders to keep as much funding as possible in the region. Dmitrii Ponomarev, exchange traded fund product manager at investment management firm VanEck, noted that Europe accounted for approximately 35% of all U.S. arms exports between 2020 and 2024, and that the U.S. supplied about 64% of arms imported by European NATO states. The Stockholm International Peace Research Institute has "raised concerns about the EU's ambitions for domestic defense manufacturers, citing historical difficulties in scaling up production, cost inflation from protectionist policies, and a persistent mismatch between supply and demand within the bloc," Ponomarev said. "U.S. defense contractors are likely to be the primary beneficiaries of this deal. While European defense firms initially reacted negatively to the news, they could still benefit in the long term, assuming the overall size of the European defense market grows faster than local companies can absorb." Push to spend local Capital will flow from private sector companies to where it's seeking the highest return if the U.S. makes its economy, markets and regulation more attractive than Europe, said Dean Turner, chief euro zone and U.K. economist at UBS Global Wealth Management's investment office. But from the current announcement, it remains hard to know what is new and additional or was going to happen anyway, he said. "In my mind, timing is the issue. If countries wish to invest in defense equipment, their procurement options at this stage are somewhat limited. In Europe we have lots of defende manufacturers, but probably not enough with capacity to deliver that kind of boost to output," he said. "Of course some money will flow to the U.S., it has to as it's the only provider of a number of key NATO-compliant defense systems. A lot will flow to the U.K. I'd still be of the view that it's Europe's intention, which [French President Emmanuel] Macron and others have been clear about, that much more of this spending has to be done locally." "So just because of a trade agreement — I'd hesitate to even call it a deal at this point — it won't be transformational in terms of U.S. defence." 'Smoke and mirrors' Simon Evenett, professor of geopolitics and strategy at IMD business school and co-chair of the World Economic Forum's Global Future Council on Trade and Investment, said the word "investment" is used "very loosely in all of the Trump trade deals," including the recent announcement of a $600 billion U.S. investment commitment by Saudi Arabia . "You unpack it and it involves spending on defense, investments by the private sector, it involves a wide range of things. What does this mean in the context of the EU-US deal? At this stage, who knows," Evenett said. The European Commission has signaled that the $600 billion refers to private sector investment, implying no additional spending by European governments beyond energy purchases, he said. "In short, this agreement involves a lot of smoke and mirrors ... this deal just buys time for further specifics to be articulated."
Forbes
an hour ago
- Forbes
Trump Hostility To Wind And Solar Has Utilities Treading Softly
AT SEA - JULY 07: A wind turbine generates electricity at the Block Island Wind Farm on July 07, ... More 2022 near Block Island, Rhode Island. The first commercial offshore wind farm in the United States, five power generating structures are located 3.8 miles from Block Island, Rhode Island in the Atlantic Ocean. The five-turbine, 30 MW project was developed by Deepwater Wind and began operations in December, 2016 at a cost of nearly $300 million. (Photo by) President Donald Trump reiterated his hostility to wind generation when he arrived in Scotland for what was ostensibly a private visit. 'Stop the windmills,' he said. But the world isn't stopping its windmill development and neither is the United States, although it has become more difficult and has put U.S. electric utilities in an awkward position: It is a love that dare not speak its name, one might say. Utilities love that wind and solar can provide inexpensive electricity, offsetting the high expense of battery storage. It is believed that Trump's well-documented animus to wind turbines is rooted in his golf resort in Balmedie, near Aberdeen, Scotland. In 2013, Trump attempted to prevent the construction of a small offshore wind farm — just 11 turbines — located roughly 2.2 miles from his Trump International Golf Links, but was ultimately unsuccessful. He argued that the wind farm would spoil views from his golf course and negatively impact tourism in the area. Trump seemingly didn't just take against the local authorities, but against wind in general and offshore wind in particular. Yet fair winds are blowing in the world for renewables. Francesco La Camera, director general of the International Renewable Energy Agency, an official United Nations observer, told me that in 2024, an astounding 92 percent of new global generation was from wind and solar, with solar leading wind in new generation. We spoke recently when La Camera was in New York. My informal survey of U.S. utilities reveals they are pleased with the Trump administration's efforts to simplify licensing and its push to natural gas, but they are also keen advocates of wind and solar. Batteries Improve Usefulness Of Wind, Solar Simply, wind is cheap and as battery storage improves, so does its usefulness. Likewise, solar. However without the tax advantages that were in President Joe Biden's signature climate bill, the Inflation Reduction Act, the numbers will change, but not enough to rule out renewables, the utilities tell me. China leads the world in installed wind capacity of 561 gigawatts, followed by the United States with less than half that at 154 GW. The same goes for solar installations: China had 887 GW of solar capacity in 2024 and the United States had 239 GW. China is also the largest manufacturer of electric vehicles. This gives it market advantage globally and environmental bragging rights, even though it is still building coal-fired plants. While utilities applaud Trump's easing of restrictions, which might speed the use of fossil fuels, they aren't enthusiastic about installing new coal plants or encouraging new coal mines to open. Both, they believe, would become stranded assets. Utilities and their trade associations have been slow to criticize the administration's hostility to wind and solar, but they have been publicly cheering gas turbines. However, gas isn't an immediate solution to the urgent need for more power: There is a global shortage of gas turbines with waiting lists of five years and longer. So no matter how favorably utilities look on gas, new turbines, unless they are already on hand or have set delivery dates, may not arrive for many years. Another problem for utilities is those states that have scheduled phasing out fossil fuels in a given number of years. That issue – a clash between federal policy and state law — hasn't been settled. In this environment, utilities are either biding their time or cautiously seeking alternatives. For example, facing a virtual ban on new offshore wind farms, veteran journalist Robert Whitcomb wrote in his New England Diary that New England utilities are looking to wind power from Canada, delivered by undersea cable. Whitcomb wrote a book about offshore wind energy, 'Cape Wind: Money, Celebrity, Energy, Class, Politics and the Battle for Our Energy Future,' published in 2007. New England Frustrated By Pipeline Shortage New England is starved of gas as there isn't enough pipeline capacity to bring in more, so even if gas turbines were readily available, they wouldn't be an option. New pipelines take financing, licensing in many jurisdictions, and face public hostility. Emily Fisher, a former general counsel for the Edison Electric Institute, told me, 'Five years is just a blink of an eye in utility planning.' On July 7, Trump signed an executive order which states: 'For too long the Federal Government has forced American taxpayers to subsidize expensive and unreliable sources like wind and solar. 'The proliferation of these projects displaces affordable, reliable, dispatchable domestic energy resources, compromises our electric grid, and denigrates the beauty of our Nation's natural landscape.' The U.S. Energy Information Administration puts electricity consumption growth at 2 percent nationwide. In parts of the nation, as in some Texas cities, it is 3 percent.
CNN
an hour ago
- CNN
Analysis: Trump bludgeoned the EU on trade. Good luck doing the same to China
President Donald Trump isn't going to bulldoze China on trade like he did Europe. Two days after the EU agreed to a framework trade deal with the White House that some of the bloc's national leaders regard as a capitulation, Trump's negotiators left talks with Chinese President Xi Jinping's team in Sweden with no breakthrough. Following a flurry of trade deal announcements celebrated by the administration, China and the US are expected to carry on talking. But the lack of significant progress was a blunt reminder of China's power, the stakes it sees in standing up to Trump and how efforts to remake global trade will be incomplete without a deal with Beijing. Instead of another win, Trump's negotiators on Wednesday will present him with a proposal to extend a pause on historic mutual tariff hikes, which would otherwise hit on August 12. The president has a choice: either approve more time for more talks, which would suit Beijing, or revive a disastrous superpower trade war. It's hardly a choice at all. 'We're just going to give him the facts, and then he will decide,' Treasury Secretary Scott Bessent, who along with US Trade Representative Jamieson Greer led the US delegation in Stockholm, told CNBC Tuesday. No one is denying Trump's on a roll with trade. He can justifiably claim significant political victories with a series of framework deals with the EU, the UK, Japan, Indonesia and the Philippines that favor the United States by imposing one-sided tariffs. Trump's bet that other nations and trading blocs would have no option but to, in his words, pay more for access to the mighty American market has paid off. And, in his trade deals, he successfully opened up some previously closed markets to American manufacturers. Trump has long regarded Europeans as freeloading off American power. He's made good on his promise to substantially reinvent the transatlantic relationship, securing a 15% tariff on the EU's exports while forcing NATO members to agree to steep increases in defense spending by 2035. His hunch that allies are so beholden to the US on security that they'd fold on trade was spot-on. Trump is also flouting the conventional wisdom of most economic experts, and he's fractured the global free trade and low tariff system in imposing some of the highest duties since the 1930s. And so far, the global economic disaster that many predicted has not materialized. Most remarkably, he's acted to impose a personal obsession he's nursed since the 1980s — tariffs. But it may only be halftime. Many of the expected consequences of this new radical US trade policy are yet to kick in, including higher prices for American consumers that could quickly sour voters on the president's approach. Goldman Sachs estimates that it could take up to eight months for price hikes to show up. Other consequences of Trump's trade romp will also take time to become obvious. That's not stopping the administration's triumphalism. 'No one's moved as fast as the world has moved with respect to Donald Trump. He has moved the world in a way that no one can imagine,' Commerce Secretary Howard Lutnick told CBNC. 'He's done this in six months; this is amazing.' But China is looming in the path of Trump's victory lap. And the president may have met his match in Xi. He faces none of the constraints that spiked the trade guns of Europe — which was wary of antagonizing Trump and risking its military umbrella and its need for US support on Ukraine. And China's resistance is grounded in economics, sovereignty and politics that are existential for its Communist Party regime. No Chinese leader — especially one like Xi, who built his power on nationalism and restoring what Beijing sees as its rightful dignity and respect — can capitulate to an American president in a trade negotiation. China's centralized political structure, unlike the often-fractious 27-nation EU, also gives it stability. It also has cards to play that can hold the US economy hostage — including its dominance of the production of rare earth elements used in the manufacture of smartphones, smart weapons, satellites and aviation engines. China reacted to Trump's initial declaration of a trade war by blocking the export of the vital elements. It has since reopened the market, but the Trump administration is still complaining that Beijing is taking too long to approve all rare earth applications for US companies. But the fact that rare earths are a Trump card for Xi is not lost on anyone. Decades ago, China's isolated leaders didn't understand US politics. That's no longer the case. And it would not be surprising if they've already concluded that if they stand up to Trump, he'll back down. Calling China's bluff in these circumstances would be a massive gamble. It's not that China wants a trade war or would not be hurt by one. Its economy is plagued by problems. But its authoritarian system means Xi can impose more pain on his people than Trump might risk inflicting on Americans. It was almost alone among global trading powers in ignoring Bessent's admonition not to retaliate after Trump's tariff outburst in April. Bruce Stokes, a visiting senior fellow at the German Marshall Fund, argued that Trump's desire to visit Beijing later this year for a summit with Xi could also be crucial. 'This is not just about economics. (Trump) wants to be tough on China, I think that's indisputable,' said Stokes. 'But I think he wants even more so to have the opportunity to go mano a mano in Beijing, both for the optics of it and he believes he's a dealmaker who can strike a deal.' Stokes added: 'The Chinese experts I talk to think that the Chinese think that this guy can be manipulated. 'This guy, you can play him, and we'll see what happens.'' Trump's zeal for one-on-one dealmaking is antithetical to the protocol-laden approach of the Chinese. Chinese negotiators seek to shield their leader by ironing out agreements at lower levels. Trump's team seeks to set up theirs for grand photo-ops that fuel his 'Art of the Deal' ego. There's zero chance that Xi would fly to a meeting with Trump and improvise an agreement, then dole out sycophantic praise for his dealmaking as top European official Ursula von der Leyen did at the weekend. Bessent told CNBC that there was extensive 'pregame' planning in Stockholm, starting with 75 Chinese officials, compared with the 15 in the US delegation. Eventually, the teams were whittled down for the nitty gritty involving Bessent, Greer and Chinese Vice Premier He Lifeng. The Treasury chief insisted that the talks had made 'good progress' toward the US position on a 'clunky' Chinese system of controls on rare earth exports. Vice Premier He said that the talks were constructive and that the two sides would continue to push for a 90-day extension of the pause on reciprocal tariffs. But Bessent cautioned that China had jumped the gun on the pause before Trump weighs in. Of course, presidents make the ultimate decision in foreign policy. But this may be mostly optics. Trump needs to be seen as the big guy. But it's also a measure of his chaotic volatility that nothing is for certain unless he signs off. China's imperviousness to Trump's box of trade tricks is not the only reason why administration gloating is premature. Trade agreements are usually complex, running to thousands of pages after exhaustive negotiations between trade lawyers. The superficial framework agreements released by the White House, by contrast, show that nettlesome disputes in deals with EU and other trade competitors are unresolved. Such skimpy agreements could easily fall apart. Trump might also react to foot-dragging on details by lashing out with tariffs. And recriminations boiling within Europe mean it's not certain that the agreement reached on Sunday in Scotland will survive. Trump's business, personal and political life has always existed in a perpetual cycle of postponing reckonings. It's therefore typical that while he's touting his winning streak on trade now, he has no idea what lies ahead. It will take time to judge how the almost-certain rises in consumer prices will impact the economy. And the shock of tariffs will take months to work through supply chains and procurement schedules drawn up years in advance. This explains why Federal Reserve Chairman Jerome Powell is loath to slash interest rates despite Trump's fury. Tariffs may not kill economic growth and cause a recession, and businesses may adapt to the new certainty of duties between 15% and 20%. Higher costs could be shared by consumers, companies and suppliers in a way that eases some of the impact on voters ahead of next year's midterm elections. But while historically high, the tariffs probably aren't sufficiently punitive to force companies to undertake the massively expensive process of relocating production to the United States — an ostensible justification for Trump's trade wars. And Trump won't be in the Oval Office forever. CEOs may reason that his successor will likely temper protectionism, especially if the economy slows. Other difficulties also loom. Canada, unlike the EU, seems in no mood to sue for peace after Prime Minister Mark Carney won power on visceral anti-Americanism in the electorate. A prolonged trade conflict would hurt Canadians more than Americans, owing to the relative size of the neighbors' economies. But Carney can make things difficult for Trump. A sudden spurt of inflation early next year, perhaps triggered by the Federal Reserve chief Trump will appoint when Powell's term ends, could also undermine the fragile foundation on which the president's trade wins rest. This all explains why a real deal with China is so important. And Beijing knows it, so it's unlikely to fold.
