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EU’s lopsided Trump trade deal will be short-lived

US President Donald Trump (right) shakes hands with European Commission President Ursula von der Leyen after agreeing on a trade deal between the two economies following their meeting in Turnberry, south west Scotland, on July 27. Photo: AFP

European Union trade negotiators may promptly celebrate the success they have achieved by clinching a deal with Donald Trump. If so, the question should be: If that passes for success, what would failure have looked like?

Financial markets and European captains of industry will doubtless heave a sigh of relief at the agreement, announced on Sunday by the US president and his European Commission counterpart Ursula von der Leyen. The continent's main exporters can base their investment and commercial plans on the 15 percent levy on US imports accepted by the Commission.

That's much lower than the 30 percent charge on European goods Trump had promised to impose on August 1 in the absence of a deal, which in turn was less than a previous 50 percent threat. Importantly, the rate applies to European cars, which join Japanese-made vehicles in escaping the 25 percent charge on US auto imports, and to the continent's pharmaceuticals and semiconductors, which may have otherwise faced punitive sector-specific treatment. The deal also enables the Europeans to shelve counter-tariffs and other measures they had lined up. Some degree of uncertainty has at least been dispelled.

Nevertheless, the tariff level still amounts to capitulation by Brussels. It must be compared not to Trump's threats, but to the 1.47 percent average rate previously applied to European goods crossing the Atlantic. Only two months ago, several EU governments were warning, that a 10 percent across-the-board charge, similar to what the UK had obtained, would be a red line that should trigger some form of response.

In addition to the added trade friction, the EU has also promised to import more energy – spending $250 billion a year on American oil and gas – and could invest some $600 billion stateside. That, at least, is Trump's interpretation of the deal. It's unclear whether these figures represent incremental amounts, or what time frame the president had in mind. Fuzzy as they are, these EU pledges at least do not look very binding.

Yet the vague agreement also suggests Sunday's announcement is unlikely to be the last word. Even at the lower rate, the tariffs will hurt the US economy. They will either bring much-needed revenue — a source of pride for Treasury Secretary Scott Bessent – or shrink imports. But they cannot achieve both at the same time. And if EU businesses do crank up investment in the US, the resulting capital flows will be to the detriment of the trade balance. All this means the EU's trade surplus with the US, which reached 198 billion euros in goods last year, partly offset by a 109 billion euro deficit on services, may not shrink much in the coming years.

When the impulsive and unpredictable president can no longer deny the destructive impact of his tariffs, he will be tempted to yet again blame US trade partners. It's puzzling that the EU, the world's largest trading power, has failed to grasp that the best way to fight bullying is to stand your ground.

The United States struck a framework trade deal with the European Union on July 27, imposing a 15 percent tariff on most US imports of EU goods but averting a spiralling battle between two blocs which account for almost a third of global trade.

"I think this is the biggest deal ever made," US President Donald Trump told reporters after an hour-long meeting with European Commission President Ursula von der Leyen, who had travelled for talks at his golf course in western Scotland.

The 15 percent tariff applies to European automobiles, Trump said, mirroring part of the framework agreement the United States agreed to with Japan. Trump said a 50 percent rate on steel and aluminium would remain in place, but von der Leyen said the tariff would be cut and a quota system put in place. Von der Leyen said the 15 percent tariff would also apply to semiconductors and pharmaceuticals, which are the subject of sector-specific investigations by the US.

Von der Leyen said the two sides had both agreed to eliminate all tariffs on certain products including aircraft and components, certain semiconductor equipment, and agricultural goods.

The deal includes $600 billion of EU investments in the US and "significant" EU purchases of American energy and military equipment. Von der Leyen said the EU would acquire oil, liquefied natural gas and nuclear fuel worth $250 billion per year for three years.

Trump had on July 12, threatened to apply a 30 percent tariff on imports from the EU starting on August 1. "15 percent is not to be underestimated but it is the best we could get," von der Leyen said.

 

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