EU-US deal 'lesser of two evils' for EU

A good deal? Or has the EU capitulated?

We see the terms of the deal as perhaps the lesser of two evils for the EU. Clearly, tariffs of 15% are far less severe than the 30% or even 50% levies that have been threatened by Trump in the last few weeks.

Yet, these are also far harsher than the near 1% average tariff rate in force before Trump 2.0, and a full five percentage points higher than the 10% rate that European negotiators were reportedly pushing for during discussions (in addition to zero tariffs for the pharma, semiconductor and car sectors).

It is also higher than the 10% tariffs negotiated by Britain, albeit the UK had the luxury of boasting a goods trade surplus with America, rather than a deficit. Could European leaders have negotiated harder and smarter in order to achieve a less economically damaging baseline tariff rate and exceptions for more sectors?

Probably yes, but the risk here is that this would likely have involved retaliatory tariffs, a missing of the 1^st August deadline, higher US trade restrictions in the near-term and a more prolonged period of uncertainty for businesses and consumers.

EU officials have instead settled for concessions that would avoid a damaging trade war and an increase in geopolitical and security risks, though it has faced no shortage of backlash from many member nations.

What are the economic implications of the deal?

The big fear for market participants following 2nd April was that an eruption of a prolonged and messy trade war could send the global economy careering into a sharp slowdown.

We are pretty confident that this will not be the case, and European businesses will now have the luxury of some certainty and the ability to plan ahead, which in of itself should limit the economic disruption.

We see the impact of the levies on the Euro Area as non-negligible, but manageable at current levels - estimates of around a 0.3-0.5% hit to the bloc’s GDP in the next three to five years is moderate, but not enough to fuel recession concerns.

These are, of course, merely estimates, and the true impact of the trade restrictions remains to be seen. As such, focus will now shift away from the state of the negotiations themselves, and towards how the tariffs impact economies on both sides of the Atlantic - the August PMIs of business activity (21/08) will provide the first such read.

There is also the small matter of ECB rates to consider. At its July meeting, President Lagarde effectively indicated a pause ahead, while hinting that the council may even be done cutting rates altogether. This stance could change quite quickly, however, should it become clear that the economic hit of the tariffs is worse than initially anticipated.