The EU-US Trade Deal Explained

After months of intense negotiations, the United States and the European Union announced a significant trade deal, effectively averting a full-scale trade war between the world's two largest economies. US President Donald Trump lauded this agreement as "probably the biggest deal ever reached in any capacity, trade or beyond trade." This video delves into the intricacies of this new EU-US trade deal, analyzing why it is widely perceived as a definitive win for the Trump administration and its trade agenda. Additionally, insights from the latest issue of our magazine discuss America's global standing, the state of its democracy, economy, and migration, and its capacity to deter a rising China.

As the official deal text is not yet publicly available, the understanding of this agreement primarily stems from statements made by President Trump, European Commission President Ursula von der Leyen, and other senior officials. This preliminary nature means the details could evolve as the deal is formally codified. However, the core element of this new agreement appears to be Trump's concession of a flat tariff rate of 15% on all EU exports to the US. This rate comes with specific exemptions: EU steel and aluminum exports, which, like those from other countries, will face a 50% tariff unless a quota system is negotiated, and aerospace parts, which will incur zero tariffs until the US determines if its aerospace industry is a national security priority, potentially leading to Section 232 tariffs.

While a 15% flat tariff is not ideal and will undoubtedly pose challenges for European businesses exporting to the US (a major market for the EU), it offers considerable relief. This is especially true given President Trump's previous threats, which included a 20% flat tariff, later suggested to be raised to 50%, and then 30% in a letter to the EU. The ability of the EU to mitigate these escalating tariff threats indicates a strategic negotiation, leading to the question of what concessions the EU made to bring down Trump's tariff demands, particularly given his vocal disapproval of the EU.

According to President Trump's statements at the post-deal press conference, the European Union agreed to three primary concessions in exchange for the reduced tariff rates. These commitments from the EU side were crucial in de-escalating the potential trade war and securing a more favorable (though still challenging) tariff environment for European exports to the United States. The details of these concessions provide insight into the strategic priorities and negotiating leverage employed by both sides during the extensive discussions.

Firstly, President Trump claimed that the EU had agreed to impose zero tariffs on US imports entering the EU. However, specific details regarding this concession were not provided. This agreement is not considered a significant concession by the EU, primarily because the European Union already maintained very low tariffs on US imports. According to the World Trade Organization, the EU's trade-weighted average tariff rate stands at a mere 2.4%, making it one of the lowest globally. Therefore, reducing an already minimal tariff rate to zero would have a comparatively small impact on overall trade dynamics.

Secondly, the EU reportedly committed to purchasing a substantial amount of American products. At the press conference, Trump asserted that the EU would buy $750 billion worth of American energy products. This also included a commitment to purchase $250 billion per year in American hydrocarbons for the remainder of Trump's term, with Von der Leyen explaining that America would effectively replace Russia as the EU's primary hydrocarbon supplier. This agreement closely mirrors a deal from Trump's first term, where Jean-Claude Juncker promised billions in American liquefied natural gas and agricultural products like soybeans to avert a trade war.

The EU's commitment extends beyond energy products to include military equipment.

As President Trump claimed, the EU would purchase "vast amounts of military equipment."

The significant purchases include:

Thirdly, the EU has seemingly agreed to invest $600 billion into the United States. However, the precise meaning and mechanisms of this commitment remain ambiguous. During the press conference, Trump stated that this $600 billion would be "additional and more than they're already investing," with subsequent reports suggesting the funds would be directed towards strategic sectors. Yet, the overall clarity of this investment pledge is limited, reminiscent of a similarly confusing aspect in the Japan trade deal previously announced. In that instance, Trump claimed Japan would invest $550 billion in US strategic sectors like semiconductors, shipbuilding, and critical minerals, implying a direct transfer of funds under his direction, with the US receiving 90% of the profits.

Japan, however, offered a contrasting interpretation of their investment commitment. Japan's top chief negotiators informed Bloomberg that the $550 billion framework encompassed a combination of investments, loans, and loan guarantees from financial institutions backed by the Japanese government. They also clarified that the $550 billion figure, which represents approximately 14% of Japan's GDP, was a ceiling rather than a mandatory requirement. Furthermore, they stated that only 1% or 2% of this sum would be directly invested by Japan into the US, with the majority taking the form of loans or loan guarantees to companies within those sectors.

The interpretation gap regarding investment frameworks is evident:

The $550 billion investment framework combines investments, loans, and loan guarantees provided by financial institutions backed by the Japanese government. The $550 billion figure is a ceiling, not a requirement, with only 1-2% directly invested by Japan.

However, Japan has interpreted the deal rather differently, as its top chief negotiators told Bloomberg.

In exchange for a tariff rate lower than Trump's initial threats but still higher than the EU's previous rates, the European Union has agreed to reduce pre-existing tariffs on the US, purchase hundreds of billions of dollars worth of American hydrocarbons and military equipment, and invest hundreds of billions more in strategic US industries. This outcome is undeniably a significant win for President Trump. Despite imposing considerable tariffs on the EU, he avoids the expected retaliation. Instead, the EU has committed to spending hundreds of billions of dollars on American goods, reinforcing his negotiating stance. Notably, the EU's agreement to spend massive amounts on American military equipment suggests that the promised increases in defense spending by European NATO members, aimed at meeting the new 5% target, will likely benefit American arms manufacturers directly.

This deal also reinforces Trump's core theory: deficit countries, such as the US, hold significant power in trade negotiations because surplus countries, like the EU, depend on the deficit country's market for their exports. While European leaders might frame this as a win for Europe, claiming it avoids a full-scale trade war, the deal clearly leaves the EU in a less favorable position than it was just a few months prior, making the European Union appear somewhat vulnerable. Furthermore, there's a tangible risk that this trade episode, combined with Trump's successful pressure campaign for NATO members to increase defense spending, will lead him to believe he can continue to exert significant pressure on Europe, potentially inviting further demands in the future.

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