US-EU trade deal wards off escalation, to raise costs for firms, consumers

Business Standard

5 hours ago

President Donald Trump and European Commission President Ursula von der Leyen have announced a sweeping trade deal that imposes 15 per cent tariffs on most European goods, warding off Trump's threat of a 30 per cent rate if no deal had been reached by August 1.
The tariffs, or import taxes, paid when Americans buy European products could raise prices for US consumers and dent profits for European companies and their partners who bring goods into the country.
Here are some things to know about the trade deal between the United States and the European Union: What's in the agreement? Trump and von der Leyen's announcement, made during Trump's visit to one of his golf courses in Scotland, leaves many details to be filled in.
The headline figure is a 15 per cent tariff rate on the vast majority of European goods brought into the US, including cars, computer chips and pharmaceuticals. It's lower than the 20 per cent Trump initially proposed, and lower than his threats of 50 per cent and then 30 per cent.
Von der Leyen said the two sides agreed on zero tariffs on both sides for a range of strategic goods: Aircraft and aircraft parts, certain chemicals, semiconductor equipment, certain agricultural products, and some natural resources and critical raw materials. Specifics were lacking.
She said the two sides would keep working to add more products to the list.
Additionally, the EU side would purchase what Trump said was USD 750 billion worth of natural gas, oil and nuclear fuel to replace Russian energy supplies, and Europeans would invest an additional USD 600 billion in the US.
What's not in the deal? Trump said the 50 per cent US tariff on imported steel would remain; von der Leyen said the two sides agreed to further negotiations to fight a global steel glut, reduce tariffs and establish import quotas that is, set amounts that can be imported, often at a lower rate.
Trump said pharmaceuticals were not included in the deal. Von der Leyen said the pharmaceuticals issue was on a separate sheet of paper from Sunday's deal.
Where the $600 billion for additional investment would come from was not specified. And von der Leyen said that when it came to farm products, the EU side made clear that there were tariffs that could not be lowered, without specifying which products.
What's the impact? The 15 per cent rate removes Trump's threat of a 30 per cent tariff. It's still much higher than the average tariff before Trump came into office of around 1 per cent, and higher than Trump's minimum 10 per cent baseline tariff.
Higher tariffs, or import taxes, on European goods mean sellers in the US would have to either increase prices for consumers risking loss of market share or swallow the added cost in terms of lower profits. The higher tariffs are expected to hurt export earnings for European firms and slow the economy.
The 10 per cent baseline applied while the deal was negotiated was already sufficiently high to make the European Union's executive commission cut its growth forecast for this year from 1.3 per cent to 0.9 per cent.
Von der Leyen said the 15 per cent rate was the best we could do and credited the deal with maintaining access to the US market and providing stability and predictability for companies on both sides.
What is some of the reaction to the deal? German Chancellor Friedrich Merz welcomed the deal which avoided an unnecessary escalation in transatlantic trade relations" and said that we were able to preserve our core interests, while adding that I would have very much wished for further relief in transatlantic trade.
The Federation of German Industries was blunter. "Even a 15 per cent tariff rate will have immense negative effects on export-oriented German industry," said Wolfgang Niedermark, a member of the federation's leadership.
While the rate is lower than threatened, "the big caveat to today's deal is that there is nothing on paper, yet," said Carsten Brzeski, global chief of macro at ING bank.
With this disclaimer in mind and at face value, today's agreement would clearly bring an end to the uncertainty of recent months. An escalation of the US-EU trade tensions would have been a severe risk for the global economy," Brzeski said.
This risk seems to have been avoided.
What about car companies? Asked if European carmakers could still sell cars at 15 per cent, von der Leyen said the rate was much lower than the current 27.5 per cent. That has been the rate under Trump's 25 per cent tariff on cars from all countries, plus the preexisting US car tariff of 2.5 per cent.
The impact is likely to be substantial on some companies, given that automaker Volkswagen said it suffered a $1.5 billion hit to profit in the first half of the year from the higher tariffs.
Mercedes-Benz dealers in the US have said they are holding the line on 2025 model year prices until further notice. The German automaker has a partial tariff shield because it makes 35 per cent of the Mercedes-Benz vehicles sold in the US in Tuscaloosa, Alabama, but the company said it expects prices to undergo significant increases in coming years.
What were the issues dividing the two sides? Before Trump returned to office, the US and the EU maintained generally low tariff levels in what is the largest bilateral trading relationship in the world, with some USD 2 trillion in annual trade. Together the US and the EU have 44 per cent of the global economy. The US rate averaged 1.47 per cent for European goods, while the EU's averaged 1.35 per cent for American products, according to the Bruegel think tank in Brussels.
Trump has complained about the EU's 198 billion-euro trade surplus in goods, which shows Americans buy more from European businesses than the other way around, and has said the European market is not open enough for US-made cars.
However, American companies fill some of the trade gap by outselling the EU when it comes to services such as cloud computing, travel bookings, and legal and financial services. And some 30 per cent of European imports are from American-owned companies, according to the European Central Bank.
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