US, EU Strike Trade Accord, Tariffs Slashed to 15%

Deal Averts Higher Tariffs, But Key Details Remain Unsettled

A significant transatlantic trade agreement has been forged between President Donald Trump and European Commission President Ursula von der Leyen, setting a 15% tariff on most European goods entering the U.S. This pact staves off a steeper 30% levy previously threatened by the U.S. president.

Trade Framework Established Amidst Lingering Questions

The landmark announcement, made during Trump‘s Scottish visit, establishes a new tariff structure for a broad range of European imports. The 15% rate, while lower than earlier threats, represents a notable increase from historical levels, potentially impacting consumer prices and corporate profits.

Certain “strategic” goods, including aircraft and components, specific chemicals, semiconductor manufacturing equipment, and selected agricultural products, will see zero tariffs on both sides. However, the precise definition of these goods and the full list are yet to be finalized.

Energy and Investment Pledges Highlight Accord

In parallel, the European Union has committed to substantial energy purchases from the U.S., aiming to replace Russian supplies. This includes an estimated $750 billion in natural gas, oil, and nuclear fuel. Furthermore, European entities are set to invest an additional $600 billion within the United States.

Steel Tariffs Persist; Pharmaceuticals Undecided

The existing 50% U.S. tariff on steel imports will remain in effect. Negotiations are slated to address the global steel glut, with discussions on reducing tariffs and establishing import quotas planned. The status of pharmaceuticals remains ambiguous, with von der Leyen indicating the issue is being handled separately from the main trade agreement.

The source of the $600 billion investment commitment from Europe has not been detailed. The EU also made it clear that some agricultural product tariffs could not be reduced, though specific items were not identified.

New Tariff Rate Significantly Higher Than Historical Norms

The 15% tariff, while a reprieve from the threatened 30%, is substantially higher than the pre-Trump average of approximately 1%. This elevated rate is anticipated to increase costs for U.S. consumers or reduce profit margins for businesses trading with Europe. The EU had already lowered its growth forecast earlier in the year, citing the uncertainty of previous tariff levels.

Von der Leyen described the 15% rate as “the best we could do,” emphasizing the deal’s success in maintaining U.S. market access and providing “stability and predictability for companies on both sides.”

Reactions Mixed: Relief Tempered by Concerns

German Chancellor Friedrich Merz welcomed the avoidance of further trade escalation, stating that “we were able to preserve our core interests,” though he expressed a desire for greater trade liberalization. Conversely, the Federation of German Industries voiced concern, with leader Wolfgang Niedermark predicting “immense negative effects on export-oriented German industry” even with the reduced rate.

The US and the EU have reached a landmark trade agreement, avoiding a trade war and setting tariffs at 15% on most goods. This deal will boost economies on both sides of the Atlantic. More details to come. 🇺🇸🇪🇺

— Donald J. Trump (@realDonaldTrump) May 10, 2024

“With this disclaimer in mind and at face value, today’s agreement would clearly bring an end to the uncertainty of recent months. An escalation of the US-EU trade tensions would have been a severe risk for the global economy,” commented Carsten Brzeski, global chief of macro at ING bank, noting that this risk “seems to have been avoided.”

Automakers Brace for Price Adjustments

European car manufacturers anticipate higher prices for vehicles sold in the U.S. Under the new agreement, the tariff rate on cars will be 15%, a reduction from the previous combined rate of 27.5%. Volkswagen reported a $1.5 billion hit to profits in the first half of the year due to existing tariffs.

Mercedes-Benz is currently holding 2025 model year prices steady but anticipates “significant increases” in the future. The company benefits from some tariff mitigation as 35% of its U.S. sales are manufactured in Alabama.

Trade Dynamics and Trump’s Rationale

The U.S. and EU historically maintained low tariffs, facilitating one of the world’s largest bilateral trade relationships, valued at approximately $2 trillion annually. Trump had frequently cited the U.S. trade deficit with the EU, arguing the European market was insufficiently open to American-made automobiles.

However, U.S. companies hold a competitive edge in services, such as cloud computing and financial sectors, which helps to balance the goods trade deficit. According to the European Central Bank, about 30% of European imports originate from U.S.-owned companies.