FRANKFURT, Germany (AP) — The European Union (EU) is bracing for a critical decision from President Donald Trump regarding potential tariffs that could significantly impact the largest trade relationship the United States has. Economists have cautioned that such tariffs could have dire consequences for businesses and consumers in both the U.S. and Europe, intensifying the stakes as the deadline approaches.
In early April, President Trump imposed a 20% import tax on all products made in the EU as part of broader tariffs aimed at addressing the U.S. trade imbalance with several countries. Although these nation-specific tariffs took effect swiftly, President Trump decided to delay them until July 9, applying a standard rate of 10% to stabilize financial markets and provide space for negotiations.
However, Trump has expressed dissatisfaction with the EU’s approach to trade discussions, threatening to escalate the tariff rate on European exports to a staggering 50%. This potential move could affect a wide range of products, increasing costs for American consumers on items such as French cheese, Italian leather goods, German electronics, and Spanish pharmaceuticals.
In response, the EU’s executive commission, which oversees trade for the bloc’s 27 member states, is seeking to reach a resolution with the Trump administration. Without an agreement, the EU has warned it is prepared to retaliate with tariffs on hundreds of American products, including beef, automotive parts, and even Boeing airplanes.
U.S. Treasury Secretary Scott Bessent conveyed optimism during an appearance on CNN’s “State of the Union,” indicating that while the EU was initially slow to engage, discussions were now making notable progress.
The EU and U.S. trade relationship is extraordinary, characterized as the most vital commercial relationship in the world by the European Commission. In 2024, trade between the U.S. and the EU in goods and services reached a remarkable value of 1.7 trillion euros (approximately $2 trillion), translating to an average of 4.6 billion euros exchanged daily, as reported by Eurostat, the EU’s statistics agency.
The primary U.S. exports to Europe include crude oil, pharmaceuticals, aircraft, automobiles, and medical equipment, while major EU exports to the U.S. encompass pharmaceuticals, cars, aircraft, chemicals, and a selection of wines and spirits.
One of the critical points of contention in the trade discussions is the EU’s 198 billion-euro trade surplus in goods, which illustrates that American consumers purchase more from European markets than the reverse. Despite this, American firms help reduce the trade imbalance through their robust presence in service sectors such as cloud computing, travel bookings, and legal services.
This services surplus lowered the overall trade deficit the U.S. experiences with the EU to 50 billion euros (around $59 billion), constituting less than 3% of the total trade volume between the two economies.
Several issues remain at the heart of the negotiations. The trade environment had previously been marked by cooperation and low tariffs, with the average U.S. tariff on European goods standing at 1.47%, while the EU applied an average 1.35% on American products. However, tensions have escalated since President Trump’s return to office in February, leading to a more confrontational stance that includes imposing a 50% tariff on steel and aluminum imports, as well as a 25% tax on automobiles and their components.
The Trump administration has raised numerous concerns it wishes to see addressed, including agricultural trade barriers exemplified by EU regulations forbidding the sale of chlorine-washed chicken and hormone-treated beef. Further complicating matters are Trump’s critiques of Europe’s value-added tax (VAT), which ranges from 17% to 27% across EU countries. Economists generally regard these VATs as trade-neutral since they apply uniformly to both domestic and imported products, and the EU has indicated that they are not negotiable.
Holger Schmieding, chief economist at Germany’s Berenberg bank, remarked that the EU and its member nations cannot make significant alterations to their established internal market structures in response to U.S. demands, especially as these requests often stem from misunderstandings about the EU’s operation.
As the deadline for negotiations looms, various stakeholders express concerns about the broader implications of higher tariffs, as they would likely translate into increased prices for U.S. consumers.
Importers face difficult choices regarding how much of the additional tax burden to absorb versus passing it on to their customers. Mercedes-Benz representatives in the U.S. have indicated they will keep prices for the 2025 model year steady for now, though the automaker anticipates that significant price increases are on the horizon due to these tariffs.
Simon Hunt, CEO of the Italian wine and spirits company Campari Group, mentioned that prices could either increase or remain stable, depending on competitors’ pricing strategies. He noted that if rivals raise their prices, Campari might choose to maintain its product prices to capture market share.
President Trump insists that making it more challenging for foreign businesses to sell in the U.S. is a strategy aimed at stimulating the revival of American manufacturing. However, many industry leaders and economists have doubted this assertion, stating that it may take years to see any such benefits materialize. Despite this skepticism, some corporations are subtly shifting production closer to their U.S. market.
For instance, LVMH, a French luxury entity known for brands like Tiffany & Co. and Louis Vuitton, may enhance its U.S.-based production. CEO Bernard Arnault mentioned at the company’s annual meeting that if tariff rates rise substantially, LVMH might have no choice but to increase manufacturing in the U.S. to mitigate tariff impacts. Arnault also hinted that the European Union’s negotiation approach will largely dictate the companies’ strategies moving forward.
The potential fallout of failing to reach a trade agreement could be significant, as certain forecasts suggest that the U.S. GDP might fall by approximately 0.7% if new tariffs of between 10% and 25% are implemented on imported European goods. Meanwhile, the EU’s economy could see a dip of around 0.3% in its Gross Domestic Product.
With the complexities involved in the negotiations, both sides might reach only a framework deal before the deadline, likely resulting in a maintained base tariff of 10%, alongside existing tariffs on auto, steel, and aluminum.
Economists predict that the most plausible resolution could involve the U.S. agreeing to retract some of its more aggressive tariff threats beyond the 10% level. However, they caution that the path to achieving such an outcome is fraught with challenges.
Offering exemptions for certain goods might facilitate a agreement between the two sides, while the European Union could consider easing regulations that the White House categorizes as trade barriers.
Ultimately, while President Trump may perceive a less aggressive outcome as a ‘win,’ the larger burden of his protectionist policies could predominantly fall on U.S. consumers, which makes the stakes of these trade discussions inherently consequential for the American economy overall.
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