EU's agreement with Von der Leyen reveals internal discords
The EU and US have reached a new trade deal, imposing a 15% tariff ceiling on most EU exports to the US, providing a temporary relief compared to initially threatened higher tariffs. However, this deal may have long-term negative impacts on both economies.
The agreement, brokered by European Commission President Ursula von der Leyen and US President Donald Trump at Turnberry golf course, aims to avoid a full tariff war through "escalation dominance" signaling by the US. Yet, it increases costs and trade distortions, with the EU estimated to experience a GDP drop between 0.2% and 0.8%, unevenly affecting member states.
Countries such as Germany, Italy, and Ireland, which have significant exports to the US, especially in industries like automotive, industrial machinery, and agriculture, are disproportionately impacted. The pharmaceutical sector, important in several member states, faces potential challenges as tariffs raise costs and disrupt established supply chains, though the specific impact varies by country depending on export exposure and product composition.
The US retains higher tariffs on strategic industries such as steel and aluminum, complicating the overall trade landscape and potentially harming EU competitiveness in these sectors. The recent appreciation of the euro further diminishes EU export competitiveness in the US, exacerbating the impact of tariffs.
The balance of tariff pass-through—whether EU exporters absorb costs or pass them fully to US consumers—will influence demand and price effects. Robust US consumption may partially cushion demand for EU goods in the near term. However, the deal deepens European dependence on the US market under less favorable conditions, raising concerns about long-term strategic economic sovereignty.
The deal has resulted in internal EU discord due to differential impacts and strategic concerns. French and German leaders, among others, have criticized the deal, with Francois Bayrou describing it as a "dark day." Ireland, especially fearful due to its accumulation of the US offshore pharma industry in County Cork, is particularly vocal in its opposition.
HSBC economists suggest that the 15% tariff would offset uncertainty for businesses, resulting in a fairly marginal impact on the EU. David Henig, the director of the UK trade policy project at the European Centre for International Political Economy, believes Trump's actions will have a marginal impact on trade and economic growth on both sides of the Atlantic.
Despite the deal, much remains to be negotiated, making it more like an impressionist painting than a clear-cut photograph. The EU is hopeful that a 15% tariff will also be applied to EU-based pharmaceutical exports to the US. The US pharmaceutical industry has been left out of all trade deals so far, with no information on potential US tariffs.
As the summer turns to autumn, von der Leyen must hope that German Chancellor Friedrich Merz and Italian Prime Minister Giorgia Meloni do not join Bayrou in criticizing the deal to avoid giving Trump more negotiating power. The obvious weakness in the EU's negotiating position might encourage more leaders to consider changes proposed by Mario Draghi, who estimates internal trade barriers within the bloc amount to almost 50% on goods and 110% on services.
In his call for a collective endeavor on both investment and regulation, Draghi offers a blueprint for leaders who know that pursuing sectional national interests is economically and socially illiterate. As the EU navigates this new trade landscape, it will be crucial to address internal discord and work towards a more unified approach to global trade.
The agreement between the EU and US, centered around policy-and-legislation and politics, includes a 15% tariff ceiling on most EU exports to the US, potentially leading to long-term negative impacts. Despite the deal, the EU is hopeful for further negotiations, particularly regarding EU-based pharmaceutical exports to the US, which remain unaffected by existing trade deals and tariffs.
