Trading principles for predictability — what the EU gave up to avoid a tariff war

Irish Examiner

3 days ago

In the hours following the announcement that the US and EU had struck a deal last weekend on tariffs, European reaction was mixed.
European Commission President Ursula von der Leyen said the deal, which imposes 15% tariffs on most items going both ways, "creates certainty in uncertain times" and "delivers stability and predictability, for citizens and businesses on both sides of the Atlantic" as she tried to sell the deal to the 27 EU member states.
But if Ms von der Leyen expected a lap of honour to ease her troubled start to her second term, one was not coming.
"It is a dark day when an alliance of free peoples, brought together to affirm their common values and to defend their common interests, resigns itself to submission," French Prime Minister Francois Bayrou wrote on X of what he called the "von der Leyen-Trump deal".
German Chancellor Friedrich Merz himself initially appeared satisfied, saying that the agreement "succeeded in averting a trade conflict that would have hit the export-oriented German economy hard".
But by Monday, amid cross-party criticism, Mr Merz said the deal would "substantially damage" his nation's finances, but acknowledged that the negotiating team "couldn't expect to achieve any more" as Mr Trump's willingness to enter into a 30% trade war was apparent.
Hungarian Prime Minister Viktor Orban, an ally of Mr Trump, said the US president "ate von der Leyen for breakfast" while Spanish Prime Minister Pedro Sanchez said he would support it "without any enthusiasm".
Across the bloc, there has been criticism of Europe's perceived capitulation, with many echoing Mr Bayrou's sentiments that it poses fundamental questions about the cohesiveness of the project. German Green MP Sandra Detzer told her parliament that the EU "has agreed to a deal that abandons fundamental principles of rules-based global trade, instead of long-term stability".
Ms Detzer's alarm is representative of a particular sharp end of the deal. According to one think tank, the deal will cost the German economy around €6.5bn in terms of its GDP in the first year, while experts have slashed the country's growth forecasts in recent months.
Fabio de Masi, a German MEP, told EuroNews this week that not only was the deal bad, it was "a betrayal" for which Ms von der Leyen should resign.
The bloc is set to face 15% tariffs on most of its goods including cars, semiconductors, and pharmaceuticals entering the US, and 'zero for zero' tariffs on a number of products including aircraft, some agricultural goods and certain chemicals – as well as EU purchases of US energy worth €643bn over three years.
But as the tariffs were set to kick in on Friday, the two sides had not agreed on all of the details, which Ms von der Leyen's commission has stressed will be a "set of principles" and not a trade deal.
On Thursday, commission spokesperson Olof Gill said that "from there will flow the additional negotiated exemptions that we're looking to bake into our agreement with the US".
Drinks tariffs
What shape those carveouts take is still to be decided, with a 15% tariff applying until they are. That is of particular concern to the drinks industry across the continent.
From Irish whiskey to French and Spanish wines, exporters across Europe have been arguing for a carveout on their products. The US tariff on European spirits is currently 10%. Brussels is keen to reduce that to zero or, for wine at least, to the Most Favoured Nation (MFN) rates that are set on a fixed cost per litre basis, rather than in percentage terms.
Until recently, spirits had benefited from zero tariffs between the US and EU following an agreement in 1997 that also included other countries such as Canada and Japan.
That lasted until 2018, when the EU response to US steel and aluminium tariffs included increased duties on US bourbon and other spirits. These were suspended in 2021.
From Irish whiskey to French and Spanish wines, exporters across Europe have been arguing for a carveout on their products. File photo
US most-favoured-nation rates for wine are 19.8c per litre for sparkling and 6.3c per litre for most other wine, which equates to very low rates in most cases.
But as Mr Trump signed an executive order overnight into Friday, there was no movement on the exemption and the drinks industry will, for now at least, pay the 15% rate. With EU officials privately briefing Reuters that negotiations could run into late autumn, that will mean financial pain for those businesses in the short-term, at least.
Speaking to journalists at a press conference on Thursday, commission spokesperson Olof Gill said: 'The commission remains determined to achieve and secure the maximum number of carve-outs, including for traditional EU products such as wine and spirits.
'It is not our expectation that wine and spirits would be included as an exemption in the first group announced by the US tomorrow, and therefore that sector, as with all other economic sectors, will be captured by the 15% ceiling.'
Motor tariffs
In Germany, a number of car manufacturers revised down profit guidance on the back of the tariffs, which will face a 15% tariff as well, but for BMW, the impact of the agreement was "exaggerated".
'I think this tariff discussion is way exaggerated and also its effects on the industry,' chief executive Oliver Zipse told the Financial Times. 'What's more important is the question, are the products attractive?'
Carveouts
At Tuesday's Cabinet meeting, enterprise minister Peter Burke updated ministers on the detail of the weekend's agreement, telling journalists that there will be exemptions to the tariff regime, with aviation one for which Ireland had successfully argued alongside others.
'The key thing is that there will be a number of carveouts. Obviously, aviation has been cited as zero-for-zero, but also in relation to agri-foods and potentially spirits.'
Ireland, like many other countries, is banking on the carveouts agreed protecting key sectors like agri-foods and that the rate for pharmaceuticals would not exceed 15%.
Like many countries across Europe, ministers here are privately saying that the deal is far from ideal, but also query what else is to be done. By Friday, they could point to Mr Trump's executive order, which imposed tariffs on many countries with whom he had not negotiated.
But there is also acceptance that the tariff regime brings with it a new reality, one with which the EU needs to grapple.
If countries are arguing for exceptions, how does the European negotiating team balance those interests? And what will the reaction be when the final deal is reached?