WHO WINS THE TRANSATLANTIC TRADE DEAL ?

Author : Peter Chase, a former US diplomat and Vice President for Europe of the US Chamber of Commerce

The US-EU trade deal announced on July 28 lifts tariffs on most European exports to the US to 15% from a present average of 1.2%, the highest level in decades. Europe will not raise its tariffs and is expected to reduce them.

The US-EU trade deal is not a win‑lose situation. It’s a lose‑lose situation. Many will portray (President Donald Trump as the winner and the Europeans as the losers because European goods now face many tariffs going into the US.  The problem for Trump, though, is what he’s doing directly undermines the US economy and US consumers.

What most people don’t see is that the US and Europe have a relationship based on investment, not on trade. When you talk about Trump’s tariffs, those affect only the movement of goods between Europe and the US across the ocean on ships. That’s a very small part of the US‑EU economic relationship. There is $3.9 trillion of US company investment in Europe, $2.6 trillion of which is in the EU, and then there’s $2.4 trillion of European company investment in the US. Those European investments are in often in manufacturing factories, and they employ literally millions of workers.

These investments drive a lot of the trade across the Atlantic. Indeed, over half of the US-EU goods trade is intra‑corporate, within the same company. If you raise tariffs on that trade, all you’ve done is make the factory in the US that employs all these American workers pay more for their inputs, which they have to get from Germany, or from Hungary, or from wherever Siemens or BMW has other component‑producing plants. US companies that have operations in Europe are similarly affected. This makes those companies less competitive, and indeed could have worse effects.

If the cost is too high or if the uncertainty of the tariff rate is too high, this disrupts trade flows. Then, if you’re missing one component in a factory in the United States, if you don’t get it, then the production has to close down. You can’t produce complex things without each of the individual components that you need for that specific product. And unfortunately, not every one of those components is made in the US. While the President may want them to be, under the best of circumstances it will take time before they are. And in the meantime, Americans will be hurt most. European factories will also suffer to an extent, but it’s going to be the American factories that have to close down that will cause the problem for Trump.

About half of foreign investment in the United States is in manufacturing; for the Europeans, a large part of that is in chemicals and transport equipment, so these will likely be hurt the most. But we also need to put this in perspective: Manufacturing is something on the order of 10 % of GDP in the United States. If manufacturing gets hurt, the economy will continue to perform, but I worry about the poor factory workers who may unnecessarily find themselves out of work.

Anyone who thinks reaching a deal with the Trump administration will at least buy stability and certainty is in for a surprise. This agreement will be significantly changed before the end of October as the US is certain to at least threaten and very likely impose another increase in one or more tariff rates for one reason or another.

Big companies will be able to ride out the new barriers because they have people around the world and can more easily shift supply relationships. A small company has no alternative.

There may be a few parts of the US-EU trade deal that will help SMEs. The US Commerce Secretary Howard Lutnick has talked about how the Europeans will “recognize American standards.” If the Europeans finally recognize that American standards are equivalent, then that makes it much easier for a small American producer to sell in Europe.

The best thing to do for the European Commission would actually be to stay focused on strengthening the rule of law governing trade, work with other countries so that all of the other countries say to Mr. Trump, “What you’re doing is illegal,” and we will respond collectively against it.

Europe pledges to buy $ 750 billion of US gas but the quickest way to reduce greenhouse gas emissions is to substitute natural gas for coal. Europe is generating huge amounts of renewable energy, but it’s nowhere near sufficient for its own economy. They will need to import and still use fossil fuels for a number of years still. Getting those fossil fuels from the US, which is now the biggest producer and exporter of hydrocarbons, makes lots of sense. The natural gas pledge was a headline for Trump that is economically meaningless. Europeans would do that anyway.