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A closer look at Trump’s EU trade deal

His game is to intimidate, prevail in the headlines, and sacrifice details in the fine print.

Trump desperately needed a win this weekend, to take everyone’s minds off the Jeffrey Epstein debacle. And the headlines about his trade deal with the EU gave him what he wanted. But the one-page “framework agreement,” negotiated in just an hour, left many details for later, and the details contradicted some of Trump’s boasts.

The optics were classic Trump. The meeting was not on neutral ground. The EU’s chief, Ursula von der Leyen, came and paid homage to Trump at his Scottish golf club in Turnberry, no less. She was depicted as desperate to finish negotiations against Trump’s artificial deadline for punitive tariffs to be imposed this Friday, August 1.

The main points of the headline deal that Trump announced suggested that the EU had given up nearly everything and Trump almost nothing. EU member nations will be hit with a new baseline tariff of 15 percent, up from 10 percent. U.S. exports to the EU will be tariff-free. The EU agrees to buy all kinds of stuff from the U.S., including $750 billion of energy products and “vast amounts” of military equipment, invest $600 billion in the U.S., and open EU markets to U.S. exports with zero tariffs. And von der Leyen conceded what EU officials had long denied, that U.S.-EU trade relations needed “rebalancing.”

Why do they need rebalancing? Trump has long made the bogus claim that EU markets were effectively closed to U.S. exports. That’s nonsense. The EU’s average trade-weighted tariff is just 2.8 percent. It is true, however, that the EU has a trade surplus with the U.S. that is typically around $200 billion annually.

One reason is that Europe makes better products that U.S. consumers want. A more subtle reason is that EU member nations have value-added taxes (VATs) averaging about 21 percent. A VAT is a kind of sales tax, levied at each stage of production or sale. Exports are exempted from VATs. So all European exports, in effect, have a 21 percent discount. Higher U.S. tariffs on European goods will provide a crude offset—a rebalancing, if you like.

However, Trump also made some concessions not mentioned in the headlines. Tariffs on European auto exports, something of special importance to Germany, will drop from their current 25 percent to 15 percent. Tariffs on European wine and spirits were put off for another day and will probably be resolved on terms favorable to the EU. Likewise the details on pharmaceuticals, a major EU export, and on semiconductors.

Enforcement was not part of the deal. The Commission of the EU cannot dictate the investment or purchase plans of its 27 member states. By the time all of this plays out, the details will long be forgotten. For now, Trump got his headlines. He also got credit for averting a major trade war of which he was the source.

The EU commitment to purchase $750 billion in U.S. energy exports over three years, mostly liquefied natural gas (LNG), is also far closer to EU anti-Putin foreign-policy goals than to those of Trump. The main consequence will be to reduce EU dependence on Russian natural gas.

“We still have too much Russian LNG that is coming through the back door … to our European Union,” von der Leyen said at her press conference. “We want to absolutely get rid of Russian fossil fuels, and therefore it is much welcome to purchase the more affordable and better LNG from the United States.”

It is instructive to compare Trump’s negotiating method in the trade talks with his recent settlement with Columbia University. In both cases, his method is extortion and intimidation. He plays on the power of the U.S. government, much of it wielded illegally, combined with his own reputation as a madman. As rational players, the Columbia trustees couldn’t be sure whether Trump would bring down the hammer and carry out his worst threats. Likewise Europe’s rational diplomats. One EU official after another was quoted as saying, in effect, it could have been worse.

So for now, Trump notches a win. The market indexes are steady at this writing. The damage to consumer prices and to the GDPs of both the U.S. and the EU will come later.

~ ROBERT KUTTNER

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