The trade deal with America shows the limits of the EU’s power

“To be free, you need to be feared,” said Emmanuel Macron, the French president, on July 30th. “We were not feared enough.” He was speaking three days after Ursula von der Leyen, the European Commission’s boss, had agreed a one-sided trade deal with President Donald Trump at his Turnberry golf course in Scotland. The agreement entails higher tariffs on European goods without any retaliation in kind. This humbling asymmetry was quickly condemned by the continent’s politicians and press. But the European Union (EU) had good reasons for its faint-heartedness. It had to make enough concessions to keep Mr Trump engaged in Europe, while limiting the damage to its own economy. For now, it seems to have accomplished that.

The ugliest part of the deal is a tariff of 15% on European exports to America. That is more than nine times higher than the rate in place before Mr Trump returned to office. But it could have been worse: earlier in July Mr Trump had threatened a tariff of 30%. The agreed rate is also good news for Europe’s carmakers, which had previously faced a 25% levy. Indeed, the agreement may have the perverse consequence of favouring European car exporters over rival manufacturers in America, where they must pay hefty duties on parts and steel.

The EU’s other big concession was cutting its own tariffs on American cars and other industrial goods to zero, as well as giving some farm and fishery products better access to the European market. The liberalisation affects about a quarter of America’s exports to the EU, including cars and footwear; the rest already enter tariff-free.

America has also made a concession of sorts that will help its own businesses. A list of European goods deemed “strategic” will face the old, low tariffs that prevailed before Mr Trump’s second term in office. These items include chipmaking equipment, natural resources and certain chemicals. The news lifted the share prices of European makers of these favoured products (see chart). The list could expand over time, giving Mr Trump a quiet way to ease the pain of his tariff madness.

The EU secured a few, subtler wins. It kept Mr Trump’s hands off its value-added tax, which the American president hates, because he wrongly thinks it disadvantages his country’s exporters. The deal said nothing about the EU’s right to tax and regulate digital services, many of which are of American origin. Nor did the deal dictate how Europe deals with China. The two sides did promise to work together to remove various non-tariff barriers to their trade. They also committed to ring-fence the transatlantic metals market against the threat of “overcapacity” (read: China). But these promises are hardly new; the EU had worked on similar initiatives with the Biden administration.

The economic impact on Europe is unclear. Goldman Sachs reckons that the hit could be a hefty 0.4% of GDP. Others are more sanguine. The calculations depend partly on how America’s other deals affect Europe’s relative position. The damage must also be set against the benefits of the deal. It has reduced uncertainty, which should help businesses make plans. The reduced tariffs on American goods could help bring down inflation, which would lead to lower interest rates. The combined effect of all this could be zero.

The talks were also about more than just tariffs. The EU sees the deal as the starting point from which to improve relations with America. Especially on defence, Europe hopes to keep America engaged. In that spirit, Mr Trump said the EU promised to buy “vast amounts” of American weaponry. The EU denied this: it does not consider weapons part of the deal.

The handshake in Scotland is not the end of the saga. The two sides must first come to a common interpretation of what was agreed. On metals, they seem to differ on whether old tariffs or old quotas rule. On pharmaceuticals, the language is clearer that the 15% tariffs will apply. But Mr Trump remains exercised by drug prices. An investigation into American pharma imports is under way and could result in tariffs on drugs made abroad. Should America make new, more onerous demands, the EU may set aside caution and retaliate against the bully that does not fear it enough. In this negotiation, it has accepted the limits of its power. In the next round it might be Mr Trump’s turn to learn his. ■