The United States and the European Union achieved a significant victory for international trade. They completed a historic trade agreement at one of Donald Trump’s golf clubs in Scotland. The deal appears to be a major shift in economic ties between the two global superpowers. It would be consistent with $600 billion in EU investments in the United States and $750 billion in US energy purchases during Trump’s second term.
In September 2018, Ursula von der Leyen, then Germany’s Defense Minister, and Donald Trump, then US President, discussed trade in a one-hour long meeting. Their conversation would go on to create a historic agreement. “I think this is the biggest deal ever made,” Trump stated following the conclusion of their talks. This new agreement will bring stability and predictability to what have been unstable and erratic trade relations in recent years.
Key Components of the Trade Deal
The agreement still leaves current tariffs on European steel and aluminium at 50%. An unexpected twist Von der Leyen said she would move these tariffs towards a quota system in future. This modification provides European producers with much-needed reprieve. Further, the deal contains language that will remove tariffs and make their impacts lighter for a number of other sectors.
The US and the EU will be implementing zero-for-zero tariffs on all aircraft and their parts. They’ll dive into additional topics like the chemicals sector, generic drugs, semiconductor manufacturing equipment, and targeted agricultural products. Tariffs on natural resources and critical raw materials will be cut by half as well. A ceiling 15% tariff will be indiscriminately imposed sector-wide, from autos to chips to drugs.
“We have a trade deal between the two largest economies in the world, and it’s a big deal. It’s a huge deal. It will bring stability. It will bring predictability,” – Ursula von der Leyen.
This fully reciprocal agreement goes a long way to address these issues and improve the flow of trade. It addresses longstanding simmering tensions over tariffs and trade barriers.
Implications for International Trade
The implications of this trade deal go far beyond economic metrics. Analysts view it as a crucial step towards stabilizing transatlantic relations that have been strained due to past tariffs and economic policies. Global markets remain very sensitive to the trade war’s impact so stay tuned to these developing trade headlines. As expected, many have praised the announcement.
Thomas Martin, Senior Portfolio Manager at GLOBALT, noted that “the market has been anticipating that the deals are going to get done.” He warned of the disappointment that could come, should these agreements fail to materialize as promised.
Upon the announcement of this specific trade deal, observers have speculated that we might see similar negotiations occurring before such clear deadlines in the future. Look for more trade agreements to appear in Congress before the August 1 cut-off. Along with these developments there’s a heavy lobbying push effort underway to extend the US-China trade truce which expires August 12.
Future Outlook
The memorandum sets both countries up for a fresh commitment to greater cooperation and trade facilitation. Economic development advocates are hopeful that this agreement will raise the game on attracting new investments. It could result in smoother integration of the US and EU markets.
From a market reaction standpoint, one big unanswered question is whether and how this unprecedented FDI will affect currency valuations. Reports indicate that the AUD/USD pair could rise toward resistance levels if positive news continues to surface from ongoing trade discussions.
“AUD/USD can head higher towards resistance at 0.6700 … (while) USD will likely head lower again this week if there is positive news on trade deals,” – CBA’s FX team.
As implementation details of this agreement become available, advocates from both sides will be watching how things play out very closely. Their commitment to zero-for-zero tariffs on all core products is a bold step in the direction of creating a more cooperative and understanding economic ecosystem.
