U.S. and European Union Announce Trade Agreement Details

Clarity on Ever Evolving Tariffs

Following the summit in Turnberry, Scotland at the end of July, the United States and the European Union have released information on an updated trade agreement. Stock markets rose upon the announcement. 

The areas where the new framework will have the largest impact are the automotive industry (tariffs on European cars have been lowered from 27.5% to 15%), the pharmaceutical industry (drugs like Ozempic will be capped at 15% tariffs instead of the 250% threatened by Trump), and the aviation industry (which will avoid tariffs in both directions). Additionally, the EU will purchase hundreds of billions of dollars in US energy, lessening their reliance on Russia.

Initial estimates forecast a decrease of 0.5% to the EU’s GDP. However, some or all of the extra cost paid by US importers will likely be passed onto consumers.

Decoding the New Tariff Rates

The joint statement covered a wide breath of goods and products. The European Union has agreed to eliminate tariffs on “all U.S. industrial goods” and to “provide preferential market access” for U.S. seafood and agricultural goods. Also covered was a 15% cap for tariffs on pharmaceuticals, semiconductors, lumber and automobiles. Notably, the 15% cap does not include steel and aluminum; instead, the US and the EU “intend to consider the possibility to cooperate” to secure supply chains with each other. 

This agreement may prove to be a mixed bag for the United States and, specifically, the automotive industry. One of Trump’s goals is to boost American car production, which was harmed by the European Union putting a 10% tariff on all US made cars. The current tariff has been adjusted to 2.5%, which is poised to increase demand in Europe for brands like Ford and General Motors. However, many American car manufacturers produce vehicles in Canada and Mexico which are still under the 25% Liberation Day tariff. That means many cars from the European Union will be less expensive than American versions, due to the comparatively lower tariff of 15%. Car manufacturers have announced investments in new US-based plants, but those will not come online for several more years. 

What to Keep an Eye On

This agreement is a step in the right direction, as evidenced by the international market reaction. Even still, Trump has shown little regard for agreements, preferring to send out surprise missives from his social media account. The Trump administration has also quietly expanded products covered by the 50% steel and aluminum tariffs.

One of the pain points of the negotiation for the European Union was the delicate position of Ukraine. In the war against Russia, Ukraine and the EU have been reliant on US support. The EU has an ability to press more economic levers against Trump, but fear of upsetting him and denying support to Ukraine reportedly kept those in check. This could have an effect on the final agreement in the coming months as the war develops, especially with regards to energy and defense equipment (both named in the joint statement).

A New Bloc on the Horizon?

Several of the European leaders expressed their disapproval with the agreement. “It is a dark day when an alliance of free peoples, brought together to affirm their common values and to defend their common interests, resigns itself to submission,” said Francois Bayrou, the Prime Minster of France.

German Chancellor Friedrich Merz went a step further to say, “if the World Trade Organization (WTO) is as dysfunctional as it has been for years and apparently remains so, then we, who continue to consider free trade important, must come up with something else.” That something else could be an international accord between the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnerships (CPTPP) agreement.

The CPTPP is a trade agreement between countries around the Pacific Ocean (including Australia, Canada, Japan, Mexico, Peru, Singapore) and the United Kingdom. Keeping in mind that the United Kingdom is not part of the European Union, a merger of these two existing blocs would carry serious weight in negotiations. Talks between the EU and the CPTPP are planned for later this year.

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