EU reaches broad tariff deal with US to avert painful trade blow

Business Times

3 days ago

[LONDON/WASHINGTON] The US and European Union agreed on a hard-fought deal that will see the bloc face 15 per cent 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 (Aug 1) 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 on Sunday at his golf club in Turnberry, Scotland, although they did not disclose the full details of the pact or release any written materials.
'It's the biggest of all the deals,' Trump said, while von der Leyen added it would bring 'stability' and 'predictability'.
The euro advanced over all Group of 10 peers in early Sydney trading, with the spot up 0.3 per cent to 1.1773 after closing up 1 per cent last week.
The deal would leave EU exports facing much higher tariffs than the bloc would charge for imports from the US, with von der Leyen saying the aim is to rebalance a trade surplus with the US. 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'.
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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. Steel and aluminium 'stays the way it is', the US president added, and drugs are 'unrelated to this deal'.
The chief of the EU's executive arm said later at a news conference that the 15 per cent rate would be all inclusive, would not 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 per cent for pharmaceuticals. Whatever the decisions later on is, of the president of the US, 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.'
The EU agreed to purchase US$750 billion in American energy products, invest US$600 billion in the US on top of existing expenditures, open up countries' markets to trade with the US 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 per cent rate to apply to pharmaceuticals and semiconductors was the bloc's promise to make US investments, according to sources familiar with the matter.
Ahead of the meeting, the EU was expecting a 15 per cent 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 per cent on Aug 1 from 13.5 per cent under current policies. The new deal brings that number down to 16 per cent.
For months, Trump has threatened most of the world with high tariffs with the goal of shrinking the 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 per cent duty on nearly all EU goods, adding pressure that accelerated negotiations, before lowering that to 30 per cent.
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 US are getting hit with a higher tax at the border.
The goals, Trump said, were more production in the US 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 per cent threat.
The EU had prepared to put levies on about 100 billion euros (S$151 billion), about a third of American exports to the bloc, if a deal was not 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.
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 per cent rate above it. The EU had also been seeking quotas and a cap on future industry-specific tariffs.
The EU for weeks, indicated a willingness to accept an unbalanced pact involving a reduced rate of around 15 per cent, while seeking relief from levies on industries critical to the European economy. The US president has also imposed 25 per cent 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 to 20 per cent, and the EU saw Japan's deal for 15 per cent 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 US would receive letters simply setting tariff rates.
Trump 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.
Trump's decades-old complaints about the global trading system heap particularly sharp scorn on the EU, which he has accused of being formed to 'screw' the US. The bloc was established in the years following World War II in order to establish economic stability on the continent.
The president has lashed out at non-tariff barriers for American companies to do business across the 27-nation bloc. Those include the EU's value-added tax, levies on digital services, and safety and environmental regulations.
Weeks of negotiations tested the EU's willingness to digest what is seen as an asymmetrical outcome, a senior EU diplomat said, but one that offers an opportunity to continue the talks without escalating further. BLOOMBERG