The EU folds on tariffs

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Pushkin.

The U.S.-EU trade deal, if it was in fact a deal, is done and the reviews are in.

The German Chancellor, Frederick Mertz, says it will do the European economy considerable damage.

The French Prime Minister says the EU has resigned itself into submission and former European trade muck-e-muck Carl Falkenberg

says the deal is proof that Europe is still an economic giant and a political dwarf.

Sounds like six thumbs down.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

I am Rob Armstrong, coming to you from an unbearably hot and humid New York City.

And I am joined from a comparatively cool and comfortable London by Ben Hall, the Financial Times Europe editor.

Hi, Ben.

Hello, Rob.

Big week for you.

You've been busy.

What just happened?

What just happened is that the EU accepted 15% tariffs on 70% of its exports to the US

and in return decided to put no tariffs on US US goods.

These tariffs, these 15% tariffs, include cars.

In theory, they include pharmaceuticals, although that may change when Trump decides a broader global policy on pharmaceutical imports into the US.

But there are lots of other things that are a little unclear.

Does it include exports of European wine and spirits, for example, to the U.S.?

Some of these details still need to be hammered out.

As a major consumer of European wine and spirits, I hope rationality prevails in that area.

But however, these kind of question mark areas are resolved, this sounds to me like a wildly one-sided deal.

Am I wrong about that?

No, you're totally right about that.

It is wildly one-sided, and it is, in many respects, a defeat for the EU.

How did we get here?

We got here because

Europe decided that it wasn't prepared to use its considerable economic leverage to try and extract a better deal out of Trump.

And I think it did that for two reasons.

One, because it feared that Trump always has escalatory dominance and would inflict huge pain in the trade sphere, but potentially in other spheres as well that would be inimical to Europe's interests.

And for the second reason that the Europeans couldn't really decide amongst themselves how muscular to get in response.

It's the classic collective action problem that Europe has, divergent interests, divergent assessments of what was at risk.

So they ended up going for the least bad deal, which was a pretty bad asymmetric deal, as you said.

Let's take those one at a time, starting with the issue of escalatory dominance.

which is, I think of that as what my children have over me in my household.

But in the case of Europe and the U.S.,

their economies are broadly the same size, and they are interrelated in both directions.

For example, the United States sells a hell of a lot of services into Europe, especially digital services.

I don't quite understand

why Europe should have been more afraid of the U.S.

than the U.S.

was of Europe.

Basically, because Europe doesn't have a history of taking strong retaliatory action.

It's not used to it

and it fears the uncertain consequences of doing so.

So you're right.

They could, for example, have taken a swipe at American technology companies under their fairly considerable new powers to retaliate under something called the anti-coercion instrument.

This was a new cache of weapons, if you like, that they adopted in the wake of Trump's first term and came into force in 2023.

they could have attacked the technology companies in all sorts of ways, but they felt that that would be super inflammatory and that

would have gotten an even more vicious response from the American president.

So it's almost like a cultural difference rather than an economic difference between the Europeans and the Americans.

Yes, I think that's absolutely true because the EU exists to negotiate free trade

amongst its members and

to liberalize markets and to form a single market in all sorts of goods and services.

And also the EU has been a force for trade liberalization in the world.

So putting tariffs on other countries is very much counter to its instincts.

And Trump, of course, has completely the opposite view.

And he's taking an America in a profoundly protectionist direction, which is alien.

to the way Europe works, notwithstanding the kind of traditional French sort of protectionist instincts, which are still there to a degree inside Europe.

We'll come to the differences of views within Europe, but I feel we should stop here for a moment and say that there is a slice of the commentariat and the economic establishment that is congratulating Europe for not escalating here.

You know, there is the view that you are putting a tax on your own people when you put a tariff up.

And basically, all you're doing is reducing the spending power of your own citizens when you do this.

And if one country does it to you,

not doing it back to them is precisely the rational response.

Now,

I'm not advocating that.

I'm just noting that there is an important line of thought that says Europe's doing the smart thing here.

It is, and I've heard senior European policymakers reach the same conclusion, which is essentially Trump is imposing a value-added tax on American consumers.

Now, that as value-added tax in Europe also works against foreign importers into the bloc because domestic producers get rebates on the tax and foreign producers do not.

But it's a tax on consumers that will not,

so this theory goes, not disrupt global supply chains or global trading patterns.

I have to say, that sounds to me a little complacent because I think Trump is destroying the worldwide trade system, and this trade deal with Europe is just another episode in his war against the global trading system.

I want to turn to the second

reason that things turned out this way that you mentioned was the kind of European collective action problem.

That the range of interests and the kind of legislative or regulatory structures in Europe made it impossible for them to respond in a decisive way.

Could you just walk us through in a little bit more detail what you mean by that?

The EU delegates power to negotiate trade, trade deals, and to take retaliatory action to the European Commission.

But the European Commission still needs a support of a majority of Member States, for example, in order to take retaliatory action.

And I think Ursula von der Leyen, the European Commission President, was preoccupied throughout with maintaining maximum unity within the EU.

And the trouble was there are quite divergent views about how hard to hit back.

The French government.

Outline the factions for us.

That's what I'm

interested in.

So the French government was very very vocal in calling for the EU to take a stronger stand and to use some of these potent weapons that the EU now has got to hit back at America.

And there were others like the Spanish who would have supported that.

Then you have the more cautious countries like Italy run by pro-Trump Giorgio Maloney.

and Friedrich Mertz, who was worried about

a kind of trade war spiraling out of control control and German exporters being the main victims of it, and was under a lot of pressure, I think, in particular from German business to try and go for a sort of safety-first solution.

And then you have those states in Eastern Europe who are worried about spillover from the trade war into other areas and in particular that Trump might start to hedge on America's security guarantee to Europe and commitment to NATO and support for Ukraine as retaliation in some kind of trade war.

So the Eastern Flank countries and the northern countries were most sensitive to that issue.

So you had these very divergent interests within the EU.

They probably would have come together if retaliation had become totally unavoidable.

But in the end, they felt that 15%, even a whopping 15% tariff, was better than a trade war and all of those other, triggering all of those other risks.

We've talked a fair amount on this show about the efforts to kind of consolidate European political power and consolidate the European economic system.

These are ideas that have been pushed by people like Mario Draghi and Enrico Letta in various reports.

And

what we've heard from a lot of Europeans

is that

Trump's aggressiveness actually opens the door for progress on that front.

That the kind of European consolidation story has more fans

in a world where the United States is hostile.

Do you think that's true?

Do you see signs of that effect taking hold?

When Trump returned to power at the beginning of this year, there was a strong sense that Europe really needed to sort of double down on its domestic efforts to integrate its markets and and to diversify away from foreign trade, which had become vulnerabilities, trade with China and now trade with America.

The reality is, though, that in the last six months, there's been very limited progress towards the agenda set out by Mario Draghi to integrate markets and to come up with much more investment, innovation, and in infrastructure to really boost Europe's productivity and growth.

So will this one-sided trade deal spur them into

extra action?

It remains to be seen, but one can only hope so.

Europe's been living on hope in that department for quite a while.

So let's turn to the future.

What is next for Europe in the broadest sense?

Whatever you think of the actual economics, this is an optical defeat.

for Europe.

There are deep questions, as you already referenced, to the security situation, other aspects of the transatlantic relationship.

What's on the agenda now that this bit is done?

Well, I think the agenda does return to the draggy plan and the difficult choices that that imposes on Europeans about wanting to integrate and wanting to pool resources in order to promote all of that investment that Europe needs.

But I think we still have to get through this trade deal.

We don't really have a trade deal.

We have a

set of verbal declarations

which are somewhat incomplete with some pretty huge question marks.

What will the treatment of pharmaceutical exports to America be once Washington has completed its Section 232 national security reviews into pharmaceuticals and other products?

What's the treatment of steel going to be?

There are still huge question marks in this trade deal that Europe is going to have to hammer out with America, and there's no guarantee that it will succeed.

So I think the uncertainty which negotiators felt they were ending with this asymmetric deal persists.

This seems to be kind of the story with Trump's policies generally.

The debate is never over because they're so focused on the

individual comments of a single man in the person of the president.

And because they're done in such an an informal way, there's always more questions to be answered.

And that seems to be how the president likes it.

So

I agree with you that this could kind of go on forever, as it were.

Yeah, and I think European leaders know that the only real answer here is to reduce Europe's dependence on America in all fields.

whether it's security, technology, or access to American markets.

And only by reducing those dependencies can you increase your leverage and your ability to stand up to this kind of bully boy tactics.

The trouble is, it's so much easier said than done.

And it's a decade of work to actually get there to reduce these dependencies and a huge amount of money.

So

I think

people conceptually understand where they need to go in Europe, but getting there is going to be hugely difficult.

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Listeners, welcome back.

This is Long and Short,

which is the part of the show where we go long things we like and short things we don't like.

Ben, are you long or short something today?

I would have to go long today and long on

U.S.

energy companies that now have a huge incentive to drill baby drill

because Europe, as part of this one-sided deal, has agreed to buy up to $250 billion of U.S.

energy imports a year, which sounds a totally fantastical number and probably a number that they will never meet.

But it does suggest that American energy producers will have a captive market on this side of the Atlantic for years to come.

Well, if you're taking the bright side of this stuff, for America, I'll take the dark side for America.

I am short the effect of these tariffs on American industry, in particular American manufacturing.

I think these tariffs will lead to lower productivity

and

lower innovation, because that's simply what the history of of trade protection suggests.

It invites corruption and gaming of the rules and

not

competing the best you can and making superior products.

So I feel extremely dour about what this is going to mean for America outside of the energy industry.

And

I'd say this is a dark day for us, even though it sounds like a bright day.

Ben, thank you for coming in.

A great pleasure.

Listeners, I will be in a better mood on Thursday, which is when I will be back in your feed.

Until then, stay sharp out there.

Unhedged is produced by Jake Harper and edited by Brian Erstadt.

Our executive producer is Jacob Goldstein.

We had additional help from Topher 4 has Cheryl Brumley, who's the FT's global head of audio.

Special thanks to Laura Clark, Aleister Mackey, Greta Cohn, and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free.

A 30-day free trial is available to everyone else.

Just go to ft.com/slash unhedged offer.

I'm Rob Armstrong.

Thanks for listening.