Trump's 30% tariff letter leaves EU scrambling to bring U.S. on side

CNBC

a day ago

The European Union has been left scrambling after U.S. President Donald Trump said he would slap a 30% tariff on goods imported from the bloc beginning Aug. 1.
European leaders were quick to respond, saying they would still work to strike an agreement with the U.S. before the start of August. The EU also further delayed countermeasures which were set to come into effect this week and warned that preparations for additional retaliatory moves were underway.
EU Trade Commissioner Maros Sefcovic on Monday told reporters that the letter had been received with "regret and disappointment ... especially considering the advanced stage of our ongoing negotiations."
Sefcovic stressed that the EU was still focused on finding a negotiated solution, but was preparing for all possible outcomes — which could include countermeasures. He also said that he would speak to his U.S. counterparts later in the day.
"I cannot imagine walking away without genuine effort," the trade commissioner said.
With less than a month before Trump's new deadline, the European Union will have to act fast to prevent the tariffs from coming into effect or risk further escalation.
While EU leaders remain determined to strike a deal, economists and analysts warned that the threat of a 30% tariff rate has nevertheless added fresh pressure to the 27-member block.
"It's very bad news for Europe," Alicia Garcia-Herrero, senior fellow at Bruegel and chief economist for Asia Pacific at Natixis, told CNBC's "Europe Early Edition" on Monday.
"Trump is pushing the commission to really come up with a better deal," she added.
Carsten Brzeski, global head of macro at ING, and Inga Fechner, a senior economist at ING who focuses on global trade, struck a similar tone.
"Trump's letter to the EU is not a love letter but also not a hate letter. It's a letter to increase pressure in the ongoing negotiations," they said in a note on Sunday.
The EU however still has options, the economists said, suggesting that one approach could be for the EU to offer to boost its purchasing of U.S. products ranging from soybeans to military equipment.
Brussels could also reduce existing tariffs and other trade hurdles on items such as U.S. cars, or introduce export bans on products that are important to the U.S. such as European-made pharmaceuticals, Brzeski and Fechner said.
"The fourth and final option would be to go into outright retaliation with either increasing tariffs on US goods or the nuclear option in trade: tariffs on digital services but also tighter regulations on US tech firms," the economists suggested, noting, however that this would likely trigger a full blown trade war.
Despite the additional pressure for the EU, the expectation remains that the bloc and Washington D.C. will strike a agreement in the coming weeks.
"I think both sides will strike a compromise. This is in the best interest of both the U.S. and the European Union," said Joerg Kraemer, chief economist at Commerzbank.
"I expect in the end, a kind of average tariff rate for the European Union for exports to the U.S. in the area of 15%," he told CNBC'S "Europe Early Edition" on Monday.
Notably, this rate would be higher than the 10% that had previously been anticipated by many and is in line with the deal that has been agreed upon by the U.K. and U.S.
Berenberg Economist Salomon Fiedler meanwhile appeared more optimistic, saying in a note that the bank was still expecting 10% duties even as "the risks are now strongly skewed towards higher rates."
One reason for optimism is that Trump has repeatedly taken extreme positions initially, and then later compromised, Fiedler argued. "The fact that Trump only threatened the new 30% rate for 1 August, instead of implementing it more quickly, suggests he is still looking to negotiate," he said.
Trump may also shy away from further tariffs as businesses start passing on higher import costs to consumers, Fiedler suggested. The domestic political backdrop may also change, which could make it less important for the U.S. president to try and keep public attention on trade, he added.
On the flipside, risk factors for higher levies include the unlikelihood that the U.S.' trade deficits — which Trump has often used as an argument for tariffs — will disappear, and the U.S. administration's reliance on tariff incomes to supplement its budget, according to Fiedler.
"The always remote hope of a good negotiation outcome — the bilateral removal of all tariffs and some other trade barriers between the EU and the US — has all but disappeared from view by now," he noted.