In the European Union’s protracted trade negotiations with President Trump, a bad deal it seems is better than no deal. The terms of the Turnberry accord — which had yet to be published on Monday afternoon — establish a minimum 15 per cent tax on most European imports to the United States and commit the bloc to buying hundreds of billions of dollars of America’s oil and gas and investing in the world’s largest economy.
The contours of the deal mirror the agreement struck between the US and Japan last week and mean Friday’s “deadline” for the expiry of a tariffs reprieve will not be much of a cliff edge for the global trading system. Trump has also struck tariff agreements with the UK, Vietnam, Indonesia and the Philippines, and talks with Beijing over a planned 40 per cent levy start in Sweden this week. Uncertainty continues to hang over Mexico and Canada — the US’s two largest trading partners who are still subject to some of his most punishing protectionist measures and a 25 per cent minimum tariff.
The US-EU truce in Scotland at the weekend concludes months of fractious talks in which Brussels unsuccessfully tried to bring Trump back to the 10 per cent baseline tariff that the UK will be subject to. The two sides have still landed below a threatened 30 per cent tax that would have stung export industries such as cars and pharmaceuticals. Monday’s “risk on” stock market rally is mostly relief that the 15 per cent isn’t as high as it could have been. For now, in a win for Germany, Europe’s car exports will be subject to the 15 per cent tariff, not the proposed 27.5 per cent, but steel and aluminium levies will remain at 50 per cent. The fate of the pharmaceuticals trade is still up in the air as Trump retains the power to increase levies when a planned report on the state of the sector is released in the coming days or weeks. The Europeans are not off the hook.
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Investors have taken far more comfort in the agreement than its signatories on the Continent. France’s prime minister dubbed it a “submission”; Olivier Blanchard, a former official at the International Monetary Fund, called it a “defeat”; Viktor Orban, the Hungarian prime minister, has used it to claim that the European Commission was “eaten for breakfast” by his American ally. Orban copycats like the Alternative for Germany party called it a “slap in the face”.
The effective US tariff rate applied on eurozone goods will rise from an average of 2 per cent before Trump’s return to the White House to about 16 per cent. Economists are now rapidly revising up their forecasts for the GDP hit to the EU, which had been assumed to be about 0.1 to 0.3 per cent this year, to upwards of 0.5 per cent. The economic impact will be asymmetric. The likes of Ireland and Germany are in the line of fire.
President Trump and Ursula von der Leyen announce their trade deal at Trump Turnberry golf club on Sunday
As this column argued a couple of weeks ago, a combination of the Europeans’ technocratic strategising, a divided bunch of member states, and reticence to use China or any of Trump’s other economic battering rams to put collective pressure on the US, meant that an outcome close to the one agreed had seemed inevitable. Brussels has since admitted that its negotiating leverage was massively hindered by the fact that the talks were “not just about trade”, according to its chief negotiator, Maros Sefcovic. The White House weaponised its security guarantees and Ukraine as part of the talks, the trade commissioner said on Monday.
The Europeans are rightly lamenting their chosen toothlessness. After the capitulation, EU diplomats have conceded that pre-emptively removing the threat of tariffs retaliation and foreclosing the use of Brussels’ anti-coercion instrument — which was set up after Trump’s 2018 tariffs assault — weakened the bloc’s negotiating position and did nothing to appease Trump.
The decision to play nice — by removing US tech firms from a global minimum taxation agreement or continually pushing back planned tit-for-tat tariffs — was also based on a reasonable but still unfulfilled claim that the US will be the biggest loser from Trump’s trade barrage. There has been a near universal agreement in the economics profession that tariffs will raise inflation for American consumers and hurt the economy through delayed investment, job losses and supply chain disruption. This is still the most likely outcome but the last few months have shown that the tariff “hit” that the Europeans and financial markets were banking on to make Trump “chicken out” has not yet materialised.
The surprising absence of tariff-induced inflation or any discernible drop-off in economic growth in data releases since April has emboldened Trump in his assault against his trading counterparts and the US Federal Reserve. It has scuppered the Europeans and the Japanese in their negotiations and means stock markets now rally at the prospect of the highest effective US tariff rate in a century. Even the bond market — the constituency that forced Trump back from the brink of his “reciprocal” tariff assault in April — is now unmoved by explicit threats to fire the Fed’s Jerome Powell and has happily swallowed a basic tariff rate that is higher than the 10 per cent announced in April. If this is Trump chickening out, the Europeans won’t want to see the president when he really means it.
In Brussels, hand-wringing over the contradictions and contortions of the EU deal has just started. Last summer the Commission held up the Draghi report as its manifesto for the next five years to narrow the economic gap with a mighty US through regulatory nimbleness, massive public funding for industries of the future, and the beginning of a strategic and military break with the old hegemon. Over the last few weeks, the EU has instead thrown its regulatory autonomy by the wayside, promised to purchase fanciful amounts of US energy, and said its newfound defence spending prowess will be mainly about buying more American weapons.