A Big, Beautiful Fiction - Does The EU/US Trade Deal Make Sense?

Forbes

18 hours ago

James Thurber's famous book 'The Secret Life of Walter Mitty' is yet another book I would recommend to readers, to continue a recurring theme of recent weeks. It is especially apt in the context of the US-EU trade deal.
Walter Mitty appeared at the end of the 1930's, a decade that was shaped by Herbert Hoover's tariff policy, and that was marked by profound economic and geopolitical tensions. Mitty's fantasies were provoked by the reality of his pedestrian, harangued life – which will appeal to European leaders who care to dream of better days. Equally, the giddiness of Mitty's fantasies has its equivalent in the promises that Donald Trump has elicited from the EU – namely, to buy and invest hundreds of billions of dollars in energy.
One week on, reaction to the US-EU trade deal is still mixed, and it is not quite clear who has 'won'. This may be because it is not a trade deal in the classical sense – at least in the sense of the laborious trade deals that the EU is used to striking, partly because a large facet of the 'deal' is based on a promise and also because the optics of the deal are quite depressing for Europe.
At the headline level, EU exports into the US will be met with a 15% tariff to be paid by the US consumer, not unlike the Japanese 'deal'. Auto companies will not be displeased with a 15% tariff. Wines and spirits, steel and notably pharmaceuticals have yet to have tariff levels finalised and there will be some relief on the confirmation of 15% tariffs on pharmaceuticals, though the investigation into pharmaceutical exports back to the US is a tail risk. Interestingly, the EU has resisted attempts to water down its digital regulations.
Politically the spin that the EU is putting on the agreement is that it was the best possible outcome in a difficult geopolitical climate (recall that the recent EU-China summit was a damp-squib). While there were some public expressions of dismay, notably from the French prime minister Francois Bayrou – these can be seen to be largely aimed at the public, rather than Brussels.
Though Ursula von der Leyen is unpopular with EU governments for the singular way she runs her office – it is populated with officials who are close to national government (i.e. Alexandre Adam one of von der Leyen's key deputies is an arch Macronist) – there is no sense that the large countries were left out of the negotiation process, and any effort to isolate von der Leyen for blame, is ignoble.
However, amongst the professional trade staff, there is still some despair at the humiliating optics of the deal, the fact that it is in many ways not binding, and the risk that there is no undertaking that it is final in the sense that another round of tariffs is imposed later.
On the positive side for Europe, and flipping to the 'Mitty-esque' part of the deal, two of the key undertakings in the deal – that European companies invest USD 600 bn in the US, in addition to a commitment to purchase microchips, as well as a commitment from the EU to buy USD 750bn in energy from the US over the course of the Trump presidency – are not at all clear in their implementation, and very much open to a fudge, with the right accounting treatment. In particular the energy purchase commitment is unrealistic because it exceeds what the EU spends on energy in a given year and US energy firms do not have the capacity to service a commitment of USD 250bn in demand from Europe, whilst also serving other markets.
In my view there are several aftershocks to watch for. The first is that the deal further damages trans-Atlantic relations, and the level of trust between the EU and the US is likely the lowest it has ever been, and this has strategic implications as far afield as Russia/Ukraine and the Middle East. One other implication may be a drift, by government and consumers, away from US brands – as this may well be an effect that is seen in other regions.
Two financial market implications are that the dampening of growth in Europe will maintain downward pressure on rates in Europe. More importantly, in the context of a very oversold dollar, there is now an incentive for EU policy makers to try hard to talk down the euro, and we may see a short-term rebound in the currency pair.
On the whole, if this is a 'final' deal and the topic of tariffs does not re-emerge in the next three years, it is not a bad deal for the semi's, autos and aerospace sectors in Europe, though the public optics are not good for the EU. The best parts of the deal for Europe are the fantastical claims of incoming European investment and energy purchases in the US. This is a Mitty style fairy tale that the Europeans hope Mr Trump believes in.
The telling factor is that this deal has now emptied all goodwill from the trans-Atlantic relationship, and effectively completes another diplomatic rupture by President Trump. From a European point of view, this is yet another 'wake up call' and the best that can be hoped for is that it accelerates projects like the savings and investment union and 'strategic autonomy'. European leaders and the European policy elite keep talking about this, but until we see hard evidence (for example, German real GDP over the last five years is close to zero), they are the fantasists.
Have a great week ahead
Mike