There are few certainties in the global economy. But one of them is that President Trump has decided to set the average U.S. tariff at around (or above) 15 percent, some 10 points higher than before his second arrival at the White House.
Although some U.S. sectors may benefit from this tariff rate, this will, overall, be bad for the United States because, sooner or later, tariffs will generate inflation (there is ample evidence from the first Trump administration that importers ended up passing on the cost of tariffs to the end consumer). Finally, tariffs may help a little to finance the huge and growing U.S. public debt, which, following the passage of Trump’s One Big Beautiful Bill Act, will increase by more than $5 trillion over the next decade, according to the Congressional Budget Office.
The question that all countries with which the United States has negotiated in recent months, including the European Union, have had to face is what to do in this new situation, in which the outcome of the negotiations is necessarily worse for all parties. It is in this context that an agreement was reached on July 27 between Brussels and Washington, which also had a humiliating staging for Europe as it was signed at a golf club owned by Trump in Scotland, to which European Commission President Ursula Von Der Leyen agreed to travel.
The European Union has accepted that the United States will impose tariffs of 15 percent on European exports, about 10 points more than have been in place until now, and up to 50 percent on steel and aluminum (some specific products, such as aircraft and their components, certain generic drugs, semiconductor equipment, and some agricultural products would be exempt from tariffs). It has also been agreed that U.S. products will enter the European market without paying tariffs (until now, the United States paid an average of less than 3 percent). And it has done so without putting in place retaliatory measures: The European Union has not activated the package of more than €90 billion in tariffs on U.S. imports that it had prepared, nor has it opted to activate its anti-coercion instrument, considered the European Union’s trade bazooka, which would have allowed it to impose taxes on U.S. companies or take other types of retaliatory measures. In addition, the European Union has committed its companies to investing $600 billion in the United States, purchasing $750 billion worth of U.S. natural gas over three years, and buying large quantities of weapons from U.S. companies. However, the European Union is maintaining the taxes that some of its member states levy on large technology companies (mostly U.S.) and has not eliminated value-added taxes on U.S. products as Washington had requested.
When assessing the agreement, two different logics can be used: geopolitical and economic. And they do not coincide. The European Union comes out badly in geopolitical terms because it has shown itself to be weak and has been unable to lead an international coalition of like-minded countries to jointly stand up to the new U.S. trade policy. This is particularly negative given that the European Union is the main trading bloc and that China, the other major giant, did confront the United States, although it was able to do so with greater confidence because it can threaten the United States with stopping sales of certain minerals that are critical to producing automobiles and the technology industry.
Furthermore, if the European Union thinks that this agreement has put an end to uncertainty, it is likely mistaken. In the fall, the Trump administration will possibly argue that, for national security reasons, tariffs on the pharmaceutical sector (and perhaps semiconductors) need to be raised even further. And when Trump perceives that he can score a political win, he may once again use the leverage provided by tariffs. All this reinforces the perception that Europe is a vassal of the United States, an idea that crystallized at the NATO summit in June, when Europeans agreed to increase their defense spending to 5 percent of GDP.
But from an economic point of view, making clear that this agreement is negative because it reduces trade and will hurt some European export sectors (especially Germany, Italy, and other countries in central and northern Europe), the European Union has done what the economics textbooks prescribe: not respond with tariffs to the imposition of tariffs. In other words, do not inflict unnecessary economic damage on yourself simply because another country has made a radical shift in its trade policy.
This decision was also influenced by the interests of German industry, which is much more exposed to the U.S. market than other countries, and whose companies viewed the possibility of a trade war with terror. In fact, European cars, particularly German ones, will enter the U.S. market with a 15 percent tariff, whereas in recent months they had been taxed at 25 percent, and all European products will have tariffs equal to or lower than those of other countries in the world, except for the United Kingdom, which secured a slightly better deal a few months ago. As the European Union has once again made an effort to show solidarity with Germany, it would be fair for Germany to return this solidarity when necessary, for example, with joint Eurobond issues to finance necessary European public goods. This is how the European Union should work.
In any case, it should be remembered that the European nonresponse, although inadequate under the logic of geopolitics, will prevent prices from rising in Europe. This will allow the European Central Bank to keep interest rates low, so that part of the tariff can be offset by some depreciation of the euro.
Finally, European commitments to purchase gas, invest, and spend on defense are not particularly significant concessions for Europe and could, moreover, remain dead letters. Neither the European Commission nor the member states can dictate to their companies where to invest. The European Union is already buying more U.S. gas, and Europe needs to buy weapons from the United States to continue supporting Ukraine. But what has surely become clear in Brussels with these negotiations is that the European Union should rapidly increase its military capabilities to achieve greater strategic autonomy. This should be combined with new free trade agreements and a firm commitment to increasing investment and reducing barriers to the internal market to boost the dynamism of the European economy.
In short, in the trade negotiations between the European Union and the United States, Washington has won a geopolitical victory, and Brussels has had to choose between bad and worse. This agreement will provide temporary respite from trade tensions, which European capitals should use to take decisive steps towards strategic autonomy.
Federico Steinberg is a visiting fellow with the Europe, Russia, and Eurasia Program at the Center for Strategic and International Studies in Washington, D.C.