The Economist: Europe averts its Trumpian trade nightmare

Key topics:EU accepts 15% tariffs to avoid harsher Trump trade retaliationDeal includes tariff-free goods like chip equipment and aircraftEurope commits to buy US fuel, invest $600bn in American economy.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.The auditorium doors will open for BNIC#2 on 10 September 2025 in Hermanus. For more information and tickets, click here..From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist.Ever since President Donald Trump unveiled his Liberation Day tariffs in April, the world’s biggest trading relationship had been on the rocks. The European Union swung from trying to sweet-talk America into making a deal, to threatening retaliation. On July 27th dealmaking won out. At his golf course in Scotland the president and Ursula von der Leyen, the head of the European Commission, unveiled the outline of a preliminary trade agreement. The bloc has pulled off a tricky balancing act: making enough concessions to keep Mr Trump happy, while limiting the economic damage.Many of the details are still to be hammered out, but the agreement appears to contain three main elements. The first is a 15% tariff on most European exports to America, including, importantly, cars. The second is a list of goods that will face zero tariffs, from aircraft and chipmaking equipment to some chemicals and raw materials. And the third is a promise by the EU to buy more American fuel and AI chips, and to invest $600bn in America.The biggest concession is the bloc’s acceptance of a 15% tariff, which is more than nine times higher than the rate in place before Mr Trump returned to office. But the worst-case scenarios were so bad that Europe’s trade negotiators gave up on returning to anything close to those halcyon days. Over the past few months Mr Trump, convinced that the EU was ripping off his countrymen, had lobbed threats of duties ranging from 20% to 50%. And, as with a recent deal struck with Japan, European negotiators at least managed to lower the tariff rate on foreign-made cars, from 25% to 15%.That will bring relief to the continent’s beleaguered carmakers. It also has the perverse consequence that Japanese and European carmakers sending vehicles to America may be whacked less than producers manufacturing cars in America, which must pay hefty duties on parts and steel. According to a preliminary calculation by the Kiel Institute, a think-tank, Germany’s industrial production would take a 0.15% hit in the short term. France and Italy would hardly be affected at all.The list of tariff-free goods, meanwhile, is a small win for the EU. The bloc had tried to push tariff-free trade during Mr Trump’s first term in office, without success. For now the list contains items that America desperately needs from Europe, such as chipmaking equipment. But it might serve as an off-ramp for Mr Trump, who could add other items American businesses say they find hard to replace. And although there had been speculation that Europe might promise to cut China out of its supply chains in order to get a better deal from America, from what is known so far, China does not feature in the agreement at all.What of the commitments to buy American? Europe’s promise to purchase $750bn worth of American energy products over the next three years is hardly a concession. The EU’s own calculations show that it is an achievable number, says Ms von der Leyen, even though it is unclear how to get there in practice. More importantly, the deal might even give Russia hawks on the continent additional leverage to push reluctant member states to finally ditch their habit of using Russian oil and gas. In June the EU still imported about 2bn cubic metres of LNG from Russia, about a quarter of what it imports from America, according to Bruegel, a think-tank. If Mr Trump’s pressure helps to end fossil-fuel imports from Russia, that is good for Europe.The investment commitments, meanwhile, are hazy. Although the deal cites a number—$600bn—it is not clear over what time period such investments are meant to be made. In recent years EU countries, plus Britain and Switzerland, have invested almost $200bn a year in America. Mr Trump has said that he wants the new investments to be on top of companies’ existing plans. But, as with most big numbers promised to the president, this one could well fall by the wayside.Investors will be relieved that the world’s biggest trade relationship is now on a steadier footing. Still, some uncertainties remain. The deal needs to be approved by the EU’s member states. The list of zero-tariffed goods will fall foul of WTO regulations, posing a challenge to rule-abiding eurocrats. Mr Trump could also still raise tariffs on some products. The president remains exercised by drug prices, for instance, and wants Americans to face lower bills. An investigation into American pharmaceutical imports is under way, and could result in tariffs on drugs made abroad, which would hurt Denmark and Ireland. Moreover, there is no knowing if further tariff threats could arise, as and when the president is next displeased. Europe has struck trade peace for now. But Mr Trump’s love of tariffs knows few bounds.

The Economist: Europe averts its Trumpian trade nightmare

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From The Economist, published under licence. The original article can be found on www.economist.com

© 2025 The Economist Newspaper Limited. All rights reserved.

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