US-EU Preliminary Agreement Probable
Considering this, it appears likely that the US and EU will achieve some form of a framework agreement even if this involves average US levies of above 10%. A preliminary agreement by 1 August remains firmly possible. Nevertheless, given the seesawing US trade policies of the recent months, the White House might in an alternative scenario firstly impose the 30% levies, potentially temporarily, as leverage in negotiations before settling on an agreement after 1 August.
Any preliminary agreement is likely to contain many caveats and carve-outs – with limited enforceability – serving only to avert further worst-case escalation and act as the starting point for further negotiations.
The EU has several ways to retaliate in the scenario of a worsening trade war, from the newly introduced but yet-to-be-used anti-coercion mechanism to possible tariffs on American exports and the imposition of export controls, though we expect any such retaliation to remain gradual.
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Dennis Shen is the Chair of the Macro Economic Council and Lead Global Economist of Scope Group. The rating agency’s Macroeconomic Council brings together the company’s credit opinions from multiple issuer classes: sovereign and public sector, financial institutions, corporates, structured finance and project finance. Arne Platteau, analyst in Credit Policy at Scope Ratings, contributed to this research.