Out-gunned Europe accepts least-worst US trade deal

Reuters

5 days ago

LONDON, July 27 (Reuters) - In the end, Europe found it lacked the leverage to pull Donald Trump's America into a trade pact on its terms and so has signed up to a deal it can just about stomach - albeit one that is clearly skewed in the U.S.'s favour.
As such, Sunday's agreement on a blanket 15% tariff after a months-long stand-off is a reality check on the aspirations of the 27-country European Union to become an economic power able to stand up to the likes of the United States or China.
The cold shower is all the more bracing given that the EU has long portrayed itself as an export superpower and champion of rules-based commerce for the benefit both of its own soft power and the global economy as a whole.
For sure, the new tariff that will now be applied is a lot more digestible than the 30% "reciprocal" tariff which Trump threatened to invoke in a few days.
While it should ensure Europe avoids recession, it will likely keep its economy in the doldrums: it sits somewhere between two tariff scenarios the European Central Bank last month forecast would mean 0.5-0.9% economic growth this year compared to just over 1% in a trade tension-free environment.
But this is nonetheless a landing point that would have been scarcely imaginable only months ago in the pre-Trump 2.0 era, when the EU along with much of the world could count on U.S. tariffs averaging out at around 1.5%.
Even when Britain agreed a baseline tariff of 10% with the United States back in May, EU officials were adamant they could do better and - convinced the bloc had the economic heft to square up to Trump - pushed for a "zero-for-zero" tariff pact.
It took a few weeks of fruitless talks with their U.S. counterparts for the Europeans to accept that 10% was the best they could get and a few weeks more to take the same 15% baseline which the United States agreed with Japan last week.
"The EU does not have more leverage than the U.S., and the Trump administration is not rushing things," said one senior official in a European capital who was being briefed on last week's negotiations as they closed in around the 15% level.
That official and others pointed to the pressure from Europe's export-oriented businesses to clinch a deal and so ease the levels of uncertainty starting to hit businesses from Finland's Nokia (NOKIA.HE), opens new tab to Swedish steelmaker SSAB (SSABa.ST), opens new tab.
"We were dealt a bad hand. This deal is the best possible play under the circumstances," said one EU diplomat. "Recent months have clearly shown how damaging uncertainty in global trade is for European businesses."
That imbalance - or what the trade negotiators have been calling "asymmetry" - is manifest in the final deal.
Not only is it expected that the EU will now call off any retaliation and remain open to U.S. goods on existing terms, but it has also pledged $600 billion of investment in the United States. The time-frame for that remains undefined, as do other details of the accord for now.
As talks unfolded, it became clear that the EU came to the conclusion it had more to lose from all-out confrontation.
The retaliatory measures it threatened totalled some 93 billion euros - less than half its U.S. goods trade surplus of nearly 200 billion euros.
True, a growing number of EU capitals were also ready to envisage wide-ranging anti-coercion measures that would have allowed the bloc to target the services trade in which the United States had a surplus of some $75 billion last year.
But even then, there was no clear majority for targeting the U.S. digital services which European citizens enjoy and for which there are scant homegrown alternatives - from Netflix (NFLX.O), opens new tab to Uber (UBER.N), opens new tab to Microsoft (MSFT.O), opens new tab cloud services.
It remains to be seen whether this will encourage European leaders to accelerate the economic reforms and diversification of trading allies to which they have long paid lip service but which have been held back by national divisions.
Describing the deal as a painful compromise that was an "existential threat" for many of its members, Germany's BGA wholesale and export association said it was time for Europe to reduce its reliance on its biggest trading partner.
"Let's look on the past months as a wake-up call," said BGA President Dirk Jandura. "Europe must now prepare itself strategically for the future - we need new trade deals with the biggest industrial powers of the world."