The depressing U.S.-EU trade deal

Avoiding the worst is still not good

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Over the weekend, the United States and the European Union reached a framework agreement on trade, removing for now the threat of apocalyptic tariffs. Strangely, though, I don’t find myself in a very celebratory mood - here’s why.

When Donald Trump first launched his trade war on ‘Liberation Day’, it looked like a catastrophe for the European Union (where I live, in The Netherlands - goedemorgen, Nederlandse lezers!). The EU was facing extremely high tariffs, and in order to avoid them the White House was demanding the bloc make massive changes to everything from economic regulation to sales tax.

What we’ve seen so far is just a framework, because negotiating an actual trade deal takes a long time. But for now at least, Trump seems to have backed off demanding the most intrusive changes. Even so, I’m not ready to declare victory yet - we haven’t even seen the text of the agreement, and with something like this the devil is really in the details. Trump lacks a detailed appreciation of policy specifics, and so something could arise in the negotiations later that cause him to blow up again.

But my real reason for being depressed is more fundamental. It’s great that Trump decided not to completely implode the transatlantic economy. But what he has decided to do instead is doom both the United States and the EU to an era of lower innovation and slower growth.

Put simply, tariffs are bad, and a 15% flat tariff rate - which will reportedly now apply to all EU exports to the U.S. - is pretty high. It means lost jobs, lost trade, higher prices, and less growth overall. It’s an unnecessary tax on economic activity, and I’m not dancing in the streets just because the alternative was much worse.

At least when Trump was setting the world on the path to general economic destruction, it was inevitable that his policy would ultimately be reversed. His initial proposals for global trade were so dire for the American economy that the markets tanked, causing him to change course. But a new grey era of lower growth will have more subtle effects, likely not stimulating a fiery reaction in the markets. As a result, it’ll be harder to reverse - we’ll just chug along somewhat poorer than we otherwise would have been.

Part of how Trump has “achieved” this, if we can use that word, is through the way he manipulated expectations. If you had told traders eight months ago that there would soon be a 15% flat tariff on all imports from the EU, plus similar arrangements for other parts of the global economy, they would have rightly seen that as bad and reacted accordingly. But by dangling the possibility of a much worse outcome in front of them, Trump has now got them to accept a fairly significant economic downgrade with a sigh of relief.

Causing a crisis then claiming to have solved it is a signature Trump move - it’s the real crises, like the war in Ukraine, that he struggles with.

It’s also notable that by eventually settling for this situation, Trump is abandoning all of the lofty goals with which he started his trade war. He claimed, if you remember, that he was going to reshore manufacturing to the United States and fund the federal government through tariff revenue. By backing down, he seems to be implicitly admitting that these goals were fantasies.

But if they’re fantasies, then what exactly is it that justifies making prices higher and everyone poorer? I’ve yet to hear him give an answer; as always with Trump, the substance gets completely lost in the chaos and the noise. Americans and Europeans frankly deserve better.

Canine postscript: Skip runs a significant trade deficit with me in the treats and kibbles sector. He’s concerned that the spread of Trumpian economics might lead me to impose tariffs.

Thanks for reading America Explained! Paid subscriptions are what keeps this newsletter a going concern, so please upgrade if you’re able to spare a few dollars a month to support independent journalism.