The trade deal struck between the US and EU in Turnberry, Scotland, last weekend is better than the alternative 30% tariffs President Trump had threatened – and the inevitable trade war that would have ensued from EU retaliation. But the agreement does little to reduce the damage to Europe’s economy we had already factored in.
This is because the average effective tariff rate has risen from about 2% last year to 16% today. We had estimated additional and across-the-board tariffs in the mid-range scenario of 15% could knock 0.5% off EU GDP. The new deal only slightly reduces that figure.
However, the trade deal does go some way to reducing uncertainty. It also marks a big improvement for certain sectors, including automobiles, aviation, microchips and generic drugs, all of which will get a 0% tariff.
Yet, uncertainty and risk still prevail for a number of reasons.
First, and crucial for Ireland, the agreement has left the area of pharmaceuticals to be decided later. The deal appears to cap future tariffs on pharmaceuticals at 15%, but this seems to be more a silent agreement than a binding clause. Higher tariffs on pharmaceuticals would be especially damaging for Ireland given the value of pharmaceutical exports to the US (see chart).
Indeed, the Central Bank of Ireland estimated that a 20% US tariff on all goods and symmetrical tariffs on US imports would mean the domestic Irish economy (based on MDD) would be about 2.5% smaller by 2027 than in a 10% tariff scenario. Given no EU retaliation and a lower-end 15% tariff, the impact will now probably be closer to 1.0–1.5%.
Second, given how opaque some of the deal’s terms are, it wouldn’t be surprising to see disagreements emerge, which would risk reigniting the dispute. For example, the EU stands little chance of increasing US energy imports by as much as the deal sets out. By some estimates, that would absorb all US energy exports and more. Noteworthy is that the US and Japan are already having disagreements about the terms of their recently agreed deal. There are also conflicting narratives about tariffs on steel and aluminium from the US and EU administrations too.
Third, the deal is not yet final. Policymakers still need to settle key details before individual countries ratify the agreement. This probably won’t be an issue, but it’s not guaranteed given that some national government members have criticised the deal for it being lopsided.
So, although this deal is a step in the right direction, it is only a small step.
The agreement is unlikely to give businesses the confidence needed to increase investment in the EU significantly and a 15% tariff is still large enough to have a disruptive effect on supply chains.