An unbalanced US-EU trade deal, given the EU’s weak hand

The deal, or rather a ‘framework to further reduce tariffs’ as Von der Leyen put it, comprises of a 15% headline tariff rate for European exports to the US starting August 1 that replaces – and does not stack with - all existing previous tariffs, according to Von der Leyen. Tariffs on US exports to the European market will not be raised and stay as is. Giving off the impression of a one-sided deal. Overall, the deal is slightly more negative compared to our earlier base case assumption of a 10% headline tariff rate, though that assumed higher sectoral tariffs.

As the 15% was already reported on last week, all eyes were on the ‘breadth’ of the deal. As it stands now, pharmaceuticals, some 25% of EU exports to the US, cars, the second largest export product to the US and of great importance to Germany, and semiconductors are all subject to the 15%. The upside of last night seemed to be on pharmaceuticals and cars as the threatened tariffs on pharma were much greater and current car tariffs are 25%. Steel and aluminium are not included in yesterday’s deal and here uncertainty about the specifics of the deal lingers on as Von der Leyen signalled a lower tariff rate – than the 50% currently – and a quota system for steel was agreed upon, contrary to what President Trump said.

This trade deal greatly reduces, but not eliminates uncertainty about trade policy which has influenced activity by consumers and businesses in the past months. Indeed, if anything 2025 has proven us US trade policy can be fickle and reversed within a week. On the one hand though, this deal clarifies the expected tariff rates on a range of goods, for now, on the other hand it means the EU will not engage in any retaliatory measure with accompanying inflationary effects and supply disruption. It also solidifies Europe’s relative position. Earlier this month the US struck a deal with Japan, a competitor to the EU for car and machinery exports to the US, for the same tariff rate, and the European tariff rate remains much lower than faced by China. We continue to expect the eurozone economy to slow in the coming quarters, starting with a -0.2% q/q reading in Q2, to be released coming Wednesday. Growth slows on the back of unwinding of the Q1 frontloading boost and the direct and indirect impact via lower global trading volumes of US tariffs. Overall, strong domestic demand, helped by rising real incomes and rate cuts should keep the economy on a recovery path. The outlook for 2026 is more constructive with government investment in defense and infrastructure, most notably in Germany, set to lift economic growth. We will review our forecasts in light of this trade deal and the Q2 GDP reading and publish it in the next Global Monthly.

The unequal trade deal seems to be largely caused by Europe’s bad hand. Subpar economic performance and the recent bout of inflation meant national governments, especially in Berlin and France were unwilling to suffer economic pain to risk a better outcome. Furthermore, navigating member states’ deviating interests may have proved hard for negotiators. Finally, the EU remains dependent on the US for its security, both in terms of military support as for military imports and remains a net importer of energy.

It is therefore not surprising that the additional commitments that the EU made lie in the areas where the EU is not self-sufficient. The EU committed to USD 750 bn of energy imports from the US over the next 3 years. Von der Leyen clarified it as being mainly LNG imports and nuclear fuels. An unfeasible amount considering extra-EU gas imports – liquified and other – totalled around EUR 100 bn in 2024. Furthermore the EU committed to significant orders of defense equipment from the US and invest EUR 600 bn in the US. According to Bloomberg reporting these commitments were needed to help secure the important 15% tariff on pharma products.

Still, a lot remains unclear at this stage about the specifics and implications of the deal. Which is not surprising as trade deal negotiations normally last months, if not years. Area’s of uncertainty are how the EU is expected to satisfy its commitment to give better market access to American companies. Finally it is unclear how we should interpret Von der Leyen’s comments in the press conference that the EU trade surplus in goods with the US, which hit almost EUR200bn last year, needed to be rebalanced. This comment comes at a time when export orientated growth models, most notably in Germany, have already come under pressure due to other factors such as elevated energy prices, a changing global trading landscape and structural factors such as ageing.