The highly developed transatlantic trade relationship between the European Union (EU) and the United States (US) is experiencing a significant disruption. The US just slapped a 20% import tariff on all EU manufactured goods. This new tariff is simply another step in the US’s larger strategy to punish countries the US has a trade deficit with. The EU now has a significant trade surplus of €198 billion, or $233 billion, in goods with the US. With these tariffs taking effects, the expected economic damage to the EU could be enormous.
Under President Trump, the US passed a 50% tariff on steel and aluminum imports. Further, it imposed a punitive 25% tariff on automotive imported goods from the EU. This change in tone marks a departure from the mutually beneficial trade relationship that characterized the US-EU context prior to Trump’s election. In the past, mutual benefit from low tariff levels created an environment for cooperation.
Europe’s other big exports to the US are pharmaceuticals, cars, aircraft, chemicals, medical instruments, wine & spirits. Currently the largest US export to Europe is crude oil. In third place, and closing fast, are the pharmaceuticals, aircraft, automobiles – and medical diagnostic equipment. As tariffs increase, European producers might find it increasingly difficult to competitively make their products. This will raise costs for US consumers and put US jobs at risk, all while harming manufacturing jobs in Europe.
In return, the US imposes a relatively low average tariff rate of 1.47% on European goods. By stark contrast, the EU’s average tariff on American products is slightly lower at 1.35%. Tariffs are sharply escalating, raising the stakes for the US economy. Should trade negotiations with the EU fail, economic predictions find we would be staring down substantial perils.
Even Bernard Arnault, CEO of LVMH, has warned that high tariffs would hurt international production. He stated,
“If we end up with high tariffs, … we will be forced to increase our U.S.-based production to avoid tariffs.”
Arnault has called on European leaders to compromise. He is confident that if given reciprocal concessions, they can go a long way to lessen the damage these tariffs have created. Additionally, he cautioned that Europe needs to negotiate carefully. If it fails to appreciate that, it will soon find itself blaming Brussels for any fallout.
Trump’s administration made no secret of their disdain for EU health and safety regulations. These regulations are things like bans on chlorine-washed chicken and hormone-treated beef. The President hasn’t stopped there, raising alarm bells about the EU’s use of value-added taxes. The taxes, which amount to 17-27%, are levied on the point of sale. These tensions have created a challenging negotiating environment and have increased volatility in the U.S.-India trade relationship.
Holger Schmieding, the chief economist at Berenberg Bank, commented on the complexity of these negotiations, saying,
“On the thorny issues of regulations, consumer standards and taxes, the EU and its member states cannot give much ground.”
Schmieding stressed that in a political climate where Trump can declare any result a win, the bar for success is raised significantly. His protectionist measures will freeze out US consumers the most.
“However, the road to get there could be rocky.”
As negotiations continue, some trade analysts are suggesting we make exemptions for certain products. This approach might help lay the groundwork for a gentler process to getting to an agreement. This strategy would address a lot of the short-term concerns without totally letting up the heat on both parties to come to a compromise. It won’t be smooth sailing, as both sides face major obstacles in the form of tangled regulatory environments and competing economic interests.
As negotiations progress, some analysts suggest that offering exemptions for certain goods could pave the way for a smoother path to a deal. This approach might alleviate some immediate concerns while maintaining pressure on both sides to reach an agreement. However, significant hurdles remain as both parties navigate complex regulatory frameworks and economic interests.
