According (apparently) to the duke of Wellington, who knew a thing or two about such matters, “Next to a battle lost, the greatest misery is a battle gained.”
And so to the U.S./EU trade deal, which was, undeniably, a victory for the Trump administration, a victory that owed a great deal not only to the president’s negotiating style, but to Brussels’s acceptance that treating Donald Trump’s threat as a bluff was too great a risk to run. Economically, the U.S. remains the West’s indispensable nation, as, indeed, it is militarily.
To those who wrongly see trade as a zero-sum game, the result was a clear win for the U.S. In response to Trump’s threat to impose a 30 percent tariff on EU imports (down from an earlier threat to impose a 50 percent levy), the EU, which had threatened retaliatory tariffs of around $110 billion on U.S. imports, eventually agreed to a 15 percent tariff on a wide range of exports to the U.S., including cars, pharmaceuticals, and semiconductors (although not semiconductor equipment). The U.S. will, however, stick with its earlier 50 percent tariff on steel and aluminum, another blow to a bloc where climate policies have been accelerating deindustrialization. This may be softened by a quota system, under which the higher tariff kicks in only after a certain point.
It is good news that the EU will be cutting its tariffs on U.S. imports on many goods, including around 70 billion euros’ worth on a reciprocal “zero for zero basis.” According to EU Commission President Ursula von der Leyen, the latter include “all aircraft and component parts, certain chemicals, certain generics . . . certain agricultural products, natural resources, and critical raw materials.”
Wait, there’s more: the EU has pledged to spend an additional $750 billion on U.S. energy products by January 2029 (a massive increase, and one that may be impossible to achieve in practice), that it would invest $600 billion in the U.S., and that it would buy American military equipment worth (in Trump’s words) “hundreds of billions of dollars.” Awkwardly, the EU has neither the legal nor financial resources to enforce such spending on its member states or on the businesses within its jurisdiction, an obvious point of future friction, and not the only one. The deal still has i’s to be dotted and t’s crossed.
“Investigations” are also continuing into the U.S./EU trade in aerospace, pharmaceuticals, and semiconductors. We will have to see where they lead. It is a safe bet that the EU’s use of antitrust against American high tech is likely to cause problems (as it should) as are measures that Brussels is planning to take in, supposedly, the interests of the fight against climate change. As of next year, these include its Carbon Border Adjustment Mechanism — “a fee” to be imposed on certain carbon-intensive imports, such as steel and fertilizers from countries like the U.S. without a carbon-pricing regime that passes muster with Brussels.
This deal is better seen as an armistice rather than a peace treaty, but a cease-fire comes with obvious geopolitical advantages at a time when Xi, Putin, and others are on the prowl. Its terms are also a useful demonstration of U.S. power, something to be celebrated but not too noisily. Our allies need us more than we need them. That does not mean we would be stronger without them.
Economically, the introduction of a modicum of certainty ought, if the armistice holds, to reap some economic rewards on both sides of the Atlantic. It will take some time to learn whether those rewards will outweigh the costs of this deal. In the long run, reduced competition from the EU concerns will, even if only at the margin, diminish the incentive for U.S. innovation and improved productivity. In the short term, this deal will also add to the tariff-driven price pressure that is already beginning to appear in the U.S. economy at a time when inflation is already running some way above the Fed’s targeted 2 percent. It takes an optimist to believe that consumers (including industrial consumers) will look at price increases in such an environment and conclude they are a one-off and nothing to worry about. There is an obvious danger that the result may be rising inflationary expectations, adding further weight to the argument that the Fed should keep interest rates where they are now.
In conclusion, Trump has won this round in his trade wars, but this is no reason to think — if American prosperity is the ultimate objective — that these wars are being fought wisely or, with that prize in mind, well. Still, it could have been worse.