EU tariff agreement could be worse, still not the final word

In January, Americans paid an average tariff of under 5 percent on European products. Similar to his recent Japan agreement, President Trump’s new agreement with the European Union will raise that rate to 15 percent. While this is lower than the threatened 30 percent rate, tariffs on EU products will still more than triple this year.

If financial markets are cheering, it’s because they expected worse, and are now hoping for some policy stability.

Instability. That stability may not last long. If Trump needs another grievance to spark a fresh dispute, he has several to choose from. The new agreement does not resolve longstanding US-EU disputes on agricultural protectionism such as GMO and beef hormone bans, nor Europe’s treatment of US tech companies. He could also revive the 17-year dispute between Boeing and Airbus over subsidies that was resolved in 2021.

Trump has already broken his word on the USMCA and the US-South Korea trade agreement, both of which he negotiated. There is little reason to believe he will honor his word with Europe, either.

A stalling tactic from Europe? The EU has a common trade policy. Individual countries like Italy and Germany do not make trade agreements the EU negotiates collectively on behalf of its member nations. That is why Trump negotiated with European Commission President Ursula von der Leyen, and not a procession of prime ministers.

Some European politicians are upset at the EU’s dealmaking, such as French Prime Minister François Bayrou, and even Trumpian populists such as Marine Le Pen. Despite their political differences, most of them would prefer that Europe retaliate against Trump’s tariffs.

My CEI colleague Iain Murray points out that the EU might be playing a stalling game here. There is a pending US court challenge to Trump’s tariff-making authority under the International Emergency Economic Powers Act (IEEPA). It is cut-and-dried on the merits. The Supreme Court will likely find Trump’s IEEPA tariffs unconstitutional, including the US-EU trade agreement.

Not only would this agreement go away, but so would the president’s ability to instantly raise tariffs. Then there would be no need for retaliatory tariffs from Europe.

Trump could still turn to other statutes allowing tariffs based on unfair competition, treaty violations, or national security. But these work more slowly, requiring studies and investigations that can take months.

Hurting American automakers. As with their concerns over the recent US-Japan agreement, US automakers are not happy with the new 15 percent tariff on EU-made autos. It is lower than what American automakers pay, currently 50 percent for their steel and 25 percent for parts made in Mexico or Canada.

Depending on how many foreign parts their vehicles contain, Fords and GMs can face higher tariffs than cars made in Stuttgart or Nagoya. This would make it cheaper for carmakers to make cars in Europe and Japan while avoiding the US altogether until shipping finished cars here.

Higher drug prices. American voters tend to be sensitive about drug prices. Tariffs on pharmaceuticals could raise both co-pays and insurance premiums. While the 15 percent listed in the US-EU trade agreement is a smaller tax than the 200 percent pharmaceutical tariffs Trump has been threatening, it is still a blow to Americans facing already-high health care costs.

The MAGA rejoinder to this is that more drugs should be made in America. Ninety percent of pharmaceuticals are currently made abroad. Make them here, and costs will go down.

However, it doesn’t work that way. When tariffs go up, domestic producers raise their prices, too. They can get away with this because nobody will undercut them. As long as a tariff is in place, Americans will pay higher drug prices whether those drugs are made in America or elsewhere. This is already the case with steel and sugar. Adding prescription drugs to the list is bad policy.

Foreign investment. Europe promised to invest $600 billion into the American economy over an undefined amount of time.

Europeans currently invest about $200 billion in America per year, so without any change in behavior this promise will be fulfilled in about three years. This continues a trend of negotiators promising Trump things they were already doing.

Trade deficit. Foreign investment increases America’s trade deficit, highlighting the strangeness of the President Trump’s trade deficit fixation. Investment helps economic growth, yet makes the president’s favorite accounting measure look worse. He may get upset if this comes to pass, and threaten to scrap or renegotiate it, even though this is perfectly predictable.

It may also take longer than expected for the investment to materialize. With tariffs tripling, Americans will likely buy fewer European goods. That means fewer dollars held by Europeans, which in turn means fewer dollars they can invest in America. While not fatal to the agreement, this does mean it could take longer than three years for $600 billion in foreign investment to materialize.

Cronyism. The US-Japan agreement has a similar foreign investment provision. However, it explicitly gives Trump some say in directing that investment. We do not yet know exactly how that will happen, since that written agreement is not yet public. The EU agreement’s text is also not yet public. If its foreign investment provisions are similar to the Japan agreement’s, Trump would gain another way to reward friends and punish enemies. He could direct capital to friendly companies, and withhold it from political opponents. It is too early to tell the extent of this potential cronyism without either written agreement being public.

In short: The tariffs Americans pay on European products will be triple what they were in January. While everyone hopes the agreement might buy some stability, that is never a guarantee with Trump. The agreement might be a stalling tactic from the EU, in hopes that a court challenge to Trump’s tariff-making authority will succeed. American automakers are mad that they could face higher tariffs than European carmakers. The energy provisions are zero-sum at best, and could reduce America’s energy independence. Prescription drug prices will likely go up. Europe’s foreign investment promises amount to what it is already doing anyway, but with the added risk of giving Trump another tool to play favorites.