Yesterday, the EU and US finally reached an agreement on a trade deal which will bring tariffs on most EU exports, including cars, to 15% – down from the threatened 30% announced as part of the Liberation Day tariffs. In exchange, the US will face “zero tariff” on its exports to the EU and over £1 trillion in investments, said President Trump on Sunday.
The deal had been long in the making, with the EU seeking a 10% baseline tariff rate – the same the UK settled on in a trade deal last month, and over twice the current 4.8% tax on EU imports. The US, on the other hand, had imposed (and then repeatedly delayed) a 30% baseline rate, which officials say reflects “reciprocal” monetary and non-monetary tariffs imposed by the EU on the US, as well as a 25% rate on car imports and threats of a 200% tariff on pharmaceuticals, the EU’s biggest export to the US.
Sources: BBC, Rabobank, The Guardian
The agreement was finalised after a one-hour meeting between EU Commission President Ursula von Der Leyen and President Trump, who called it “the biggest deal ever made”. Von Der Leyen praised the deal as “the best we could get,” saying it would bring stability and predictability to a market rife with fears of a trade war between two of the world’s biggest economic superpowers.
France’s Prime Minister said the deal marked “a dark day” for Europe, which was “submitting” to the US. A German federation of industrial groups predicted “considerable negative repercussions” would come from the agreement, which is estimated to cost EU businesses £67 billion this year at current trade levels. Hungarian President Orban, who is also threatening to veto the EU budget over frozen funds, has criticised the agreement for being asymmetrical, saying Trump “ate von der Leyen for breakfast.”
Perhaps one of the most consequential developments has been the removal of tariffs on cars and car parts, which previously stood at 25% and is now nearly halved, only seeing the 15% baseline tariff. This may entice firms which were considering halting US exports – like Volkswagen – back to the US market.
“Although the tariff rates are lower than may have been feared, European carmakers may have hoped that the agreement would go further in reducing the tariff rates,” said Tom Shave, President of European and Asia-Pacific Operations at Ryan, a global tax services and technology firm. “Given the size of the US market, they are likely to pursue selling to US consumers again, who may end up being worse off with tariff costs passed onto them.”
While most exports, including cars and pharmaceuticals, are included in the deal, steel and aluminium exports remain taxed at 50%, although this may be changed to a quota system in the coming months. Tariffs on wine, beer, and spirits are still being negotiated. The deal also includes the EU purchasing around £560 billion worth of US energy and investing a further £450 billion in US businesses during the remainder of President Trump’s term.
Global stock markets rallied at news of the deal, with the UK’s FTSE100 hitting a record high this morning and the European index STOXX 600 opening 0.7% higher after the announcement. While the deal falls short of what many had hoped, it comes just in time to avoid the far more disruptive 30% rate, which would have come into effect on Friday.
As the US negotiates more and more trade deals just in time for its self-imposed deadline, business uncertainty and fears of a global trade war will be fading away, leading to a more stable economic environment in the long term.
However, the constantly changing tariff landscape that is emerging as more trade deals are finalised may be putting pressure on businesses to keep up. “Businesses [should] stay close to further announcements and carefully review their supply chains to minimise the impact of tariffs as far as possible. Given the steady stream of trade agreements being announced by the US, this is an ongoing task,” said Shave.
