President Donald Trump hailed the trade deal with the European Union announced in Scotland last Sunday as "the biggest deal of them all." But a closer look shows that it is actually not really a deal. It is more a term of reference, like the ones that the White House reached with the United Kingdom and Japan. Even though the immediate threat of an escalating trade war has been avoided, it cannot be labeled as a good agreement for Europe.
Furthermore, the ink of the text barely dried before it became clear that the agreement is subject to different interpretations, especially so for the pledge by Europe to purchase $750 billion in US-produced energy products and the promised European investments of $600 billion.
The European Union had been next in line after the United Kingdom and Japan to get a deal with Trump before August 1, when 30 percent tariffs on all European exports would have kicked in. To avert that prospect, European Commission president Ursula von der Leyen flew to Scotland to meet with Trump on his golf course outside Glasgow. Beforehand, discussions had been intense between Commerce Secretary Howard Lutnick and the top trade envoy Jamieson Greer on the US side and EU trade commissioner Maroš Šefčovič and his team on the other side.
The EU-US trade deal unfortunately confirms the president´s fallacious narrative that global trade has been unbalanced and that the United States is suffering from this unfairness. It also cements a new trading order where tariffs are accepted as a geopolitical cudgel. A 15 percent tariff accepted by the European Union is definitively better than the 30 percent threatened by Trump. But it is still a lot more than the status of trade before Trump's second term, when the average tariff rate between the European Union and the United States was only a few percentages. Today we face the highest transatlantic tariffs in 70 years.
In the Scotland accord, the US administration agreed to lower tariffs from the threatened 30 percent to 15 percent on basically all European goods. Aircraft parts, national resources, and critical minerals are exempted from tariffs, and other goods will be added but are still to be discussed. No exceptions were made for cars, which will be subject to the 15 percent tariff instead of the much higher rate previously threatened. Pharmaceuticals are still hit with a 15 percent tariff as of August 1, according to the White House—but only after the US investigations into allegedly unfair trade practices under Section 302 of the US Trade Act have been completed, according to the European Commission. The 50 percent duties on steel, copper, and aluminum remain.
Other parts of the accord are more ambiguous. The European Union, for example, promises to purchase $750 billion worth of American oil, gas, and nuclear fuel, partly to phase out the dependence on Russia that some member states still face. Many experts question the realism of such a sum, however. The European Union also commits to invest a further $600 billion in the United States, in military equipment and other areas. But these commitments are subject to member state competence and are up to countries and individual companies to deliver. The European Commission claims that these sums are more an estimation of what companies have announced already. This investment is non-binding and more of an intention, according to the European side, whereas the White House sees it as a promise until 2028. It is questionable how these investments can be measured and evaluated.
What is the direction of a free trade deal?
Ten years ago, during the administration of President Barack Obama, the European Union and the United States were negotiating a potentially very ambitious trade agreement between them, the Transatlantic Trade and Investment Partnership, TTIP. One of the trickiest items in the negotiations was agriculture. The agreement never came to fruition. In the Scotland deal, we find a promise to move "in the direction of tariff free trade." What this means is very obscure. The European Union will supposedly eliminate most tariffs on goods and some non-sensitive agricultural products such as nuts, ketchup, and cocoa, and increase quotas on other products. The White House claims the deal would apply to a vast list of goods, including agriculture, and also include easing of nontariff barriers in digital trade. But on what products will the United States take away their tariffs?
The Commission has vehemently denied that it has agreed to change any regulation on digital technology and maintains rather that the trade framework speaks about mutual recognition when it comes to nontariff barriers. Details will obviously have to be ironed out at a later stage, but as free trade agreements are subject to agreement by all EU member states and the European Parliament, this process can turn out to be complicated.
An additional uncertainty relates to whether the mutual tariff concessions would be in line with World Trade Organization (WTO) rules on the most favored nation system, or MFN. The deal between the United Kingdom and the United States is clearly not MFN compliant, and most likely none of the other agreements are either. Ignoring these rules further erodes the WTO system.
Why was Europe not tougher in confronting the Trump administration? The European Commission has the mandate to negotiate trade matters on behalf of all 27 member states. They all had agreed on a list of possible retaliation on goods worth €93 billion. The Commission also retaliated on April 4 with a smaller list of counter tariffs, worth €22 billion, based on the Section 232 tariffs, evoking national security, on steel and aluminum. These tariffs were withdrawn less than 24 hours later when Trump lowered his tariffs to 10 percent while opening a 90-day pause on his higher tariffs.
But the European Commission decision to withdraw its retaliatory tariffs was a mistake. It would have been better to keep the retaliatory measures while declaring that there was a longer list that could also be used. Instead of showing muscles against illegal tariffs, the European Union seemed weak. Furthermore, the 50 percent US tariffs on steel are still there. Europe could also have declared the possibility of excluding US companies from investing in the internal public procurement market, as China recently did on medical equipment.
But the Commission and several member states were eager to get a deal and end the uncertainty. There was also fierce pressure from industry, notably in Germany and Italy, to get a quick deal and minimize the damage from Trump's actions. A tariff of 15 percent thus emerged as an acceptable level. Concerns about provoking a further US disengagement in Ukraine probably played a part as well. So maybe this was the only deal possible.
Can the trading system survive?
The most worrying outcome of this deal is that it confirms the false narrative of the Trump administration as it relates to trade. At the press conference President von der Leyen talked about the need to correct the trade balance and that the United States had been unfairly treated because of the trade deficit with Europe in goods. This concession goes totally against the traditional line of the European Commission and the member states, which have always argued that that the United States has a trade surplus with Europe when it comes to financial and other services, and that trade imbalances are not necessarily bad.
Their comments make clear that a new world order of tariffs is now the new norm, in which all kinds of threats to get your way are acceptable—whether the issues are immigration, fentanyl, trade imbalances, or the treatment of certain ex-presidents.
Are we seeing the last nail in the coffin for the global trading system?
The stock markets and economists expressed relief and claimed that the deal gave clarity and predictability after the last three months of tariffs coming and going and deadlines postponed and imposed. But one can legitimately ask how much clarity there is actually going to be, given that the agreement is not a legally binding deal.
The European Union has more free trade agreements than anyone else. That is a great asset. And it has lately been busy trying to secure new deals with Indonesia, Malaysia, Mexico, and India. It is also in the process of ratifying an agreement made with the four countries of Mercosur (Argentina, Brazil, Paraguay, and Uruguay). The European Commission president has also declared an intention to approach the 12 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (Asia and Pacific) countries, with the aim to deepen the alliance, maintain the rule-based system in trade, and possibly push for new plurilateral deals among them.
All the "deals" made by the Trump administration are likely to increase prices for American consumers and ultimately hurt the American economy. If other countries increasingly turn away from the American market, deepening trade between each other, the trading system could survive. Such a move by other countries would show that open, rule-based trade is still worth defending. But with the big economies all giving into pressure from the Trump administration, the trading system's survival faces a difficult credibility test.
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