Eurozone: US Stepped-Up Tariff Threat – Negotiations or Concessions?
At least within markets there is some relief that President Trump has deferred his ramped up 50% tariff threat from early June to July 9. Unambiguously positive is the fact that a better line of communication, if not rapport, now seems to exist between the U.S. president and EU Commission President von der Leyen, which may help prevent or at least ease political differences ahead. But the fact that EU governments now seem keener to accelerate trade negotiation ignores the political reality of what will be discussed as the U.S. does not seem interested in a deal in which both it and the EU benefit equally but in winning clear concession that are either unpalatable or unworkable for the EU. The question is how much will the EU concede and given the likelihood that further tariffs increases are still likely, whether any retaliatory action leads to further tariffs from the U.S. and a possible stepped-up trade war.
Better Lines of Communication?
Perhaps the most predictable thing about Trump is his unpredictability, save for his obvious sensitivity to the vagaries of the U.S. bond market. Having initially announced a 20% levy on EU exports to the U.S. on 2 April, but which were halved a week later to allow for time for talks, last Friday, he threatened a 50% rate and from as soon as 1 June. But after what he called a “very nice call” with von der Leyen, Trump has agreed to delay such ramped-up tariffs until 9 July and where EU leaders have expressed hopes for a quick deal to ease if not resolve any trade war. Seemingly, Von der Leyen initiated the call, all the more notable given Trump’s aversion with the EU and his preference of dealing with individual national leaders. In this regard, an EU spokesperson suggested that this reflected a mutual intention to speak to each other. Adding to the clear attempt to ease tensions between the U.S and EU, Italy PM Meloni, who has a more genuine rapport with Trump is reported to be trying to organise a meeting between U.S. and European leaders in early June or at a planned NATO summit on June 24-25. In the meantime, the EU is now underlining its desire for ‘meaningful and substantive talks’
Speeded-Up Talks About What?
However, despite this apparent added zeal to reach a trade agreement, there is seemingly nothing new on the table from the EU and where it unclear how and when evolution can occur. It seems that the EU is still pushing for a mutually beneficial deal that could include both sides moving to zero tariffs on industrial goods (the so-called "zero-for-zero" tariff offer), and the EU buying more arms and LNG from the U.S. Moreover, the EU stance remains one in which it wants to the 25% tariffs on steel and cars removed and for Trump to drop his so-called "reciprocal" tariff, which was provisionally set at 20% for the EU but is being held at 10%.
The U.S. Wants Concessions not a Mutual Deal
But the U.S. has its own agenda, allegedly to address its goods trade deficit with the EU, albeit also a means to raise revenue. Indeed, the U.S has a series of demands on the EU, identifying so-called non-tariff barriers, including value-added tax, EU food safety standards and national digital services taxes. In other words, the U.S is demanding a series of concession from the EU in which it would call a deal but would be presented to its domestic audience as tangible and symbolic wins.
This is obviously a problem both politically and legislatively for the EU - taxes are largely set by individual EU states and where the EU does not believe that what the U.S. regards as non-tariff trade barriers actually exist as they instead purely reflect standards.
In addition, the EU also has to consider whether its threat of tariff retaliation is a realistic one as it may merely trigger an even greater adverse U.S response – NB; some EUR 20 bln in retaliatory tariffs on US agricultural and industrial goods will take effect from 14 July without a deal, with larger and more wide-ranging measures under consideration, of not already on the back burner, allegedly some EUR 95 bln of targets including aircraft, motorises vehicles and bourbon.
Against this backdrop, markets and businesses are in for more tariff roller coasting, the irony being that a far as sentiment is concerned it seems EU services are now reacting more adversely that hitherto more tariff-sensitive manufacturing companies.