Since the suspension on 9 April by President Trump of so-called ‘reciprocal tariffs’ higher than 10%, the United States has announced trade agreements with the United Kingdom and China (on 8 May and 12 May, respectively). The UK agreement offers a preferential tariff rate quota (TRQ) on UK exports of steel, aluminium and cars, in exchange for preferential concessions for US beef and ethanol. The China agreement rolls back the 115% increase in tariffs that both sides introduced in early April.
The two agreements do not spell out in any detail future bilateral negotiation steps, and Congress is likely to react very negatively to any agreement to eliminate tariffs without prior Congressional approval through Trade Promotion Authority. The agreement with the UK replaces 25% tariffs with TRQs, although the UK is only a small exporter and it is unclear whether the US is ready to make similar offers to major exporters including the European Union and Japan.
Where does this leave the EU? As a pillar of the trading system, the EU can only consider offering tariff reductions on a most-favoured nation basis and cannot accept an agreement that would maintain US tariffs at higher levels than EU tariffs for almost all products. At this stage the average US tariffs on the EU are above 10%, while the EU average tariff is lower than 2%. The EU therefore should challenge the 10% tariffs via the World Trade Organisation (WTO), preferably as part of a broader coalition.
In the shorter term, the EU’s main negotiating objective should be to limit the impact of US sector-specific tariffs. The EU could agree not to retaliate against US steel, aluminium and auto tariffs if given TRQs that preserve current trade levels. It would also be critical to avoid new tariffs on exports important to the EU, such as pharmaceuticals and civil aircraft. Meanwhile, the EU phase-out of imports of Russian gas opens up increased market opportunities for imports of US liquified natural gas (LNG), though any EU commitment on LNG imports should not discriminate between non-Russian suppliers.
In terms of regulatory issues, the fundamental principle should be that any action agreed with the US must be consistent with the EU regulatory framework and should imply balanced commitments from both sides. Provided these parameters are respected, there might be scope for progress on conformity assessment and mutual-recognition agreements in sectors such as cars and pharmaceuticals. There could also be an interest in a dialogue on the implementation of digital regulation, including artificial intelligence.
One important issue will be how the EU positions itself relative to the US-China negotiations. The main risk is that US companies gain preferential access to the Chinese market. To limit such risks, the EU-China Summit in July should agree a process of discussions on facilitating mutually beneficial trade and investment, and should reaffirm a commitment to cooperate on ambitious WTO reform, including issues relating to the level playing field.
Insofar as the US also seeks to address structural issues, such as macroeconomic imbalances or the role of subsidies in distorting global markets, the EU should be ready to cooperate with the US and to explore the option of discussions in a plurilateral setting. Bilateral cooperation with the US should not however compromise respect for WTO rules, or the autonomy of EU trade and investment relations with China.
Negotiations with the US should be backed up by a substantial retaliation threat in case talks fail. EU retaliation against US steel and aluminium tariffs is already set to apply automatically in mid-July unless a satisfactory agreement is reached. The European Commission on 8 May started a consultation on a €95 billion tariff retaliation list and a €4.4 billion list of export restrictions on steel scrap and certain chemical products. This would be the most wide-ranging retaliation ever adopted by the EU, even if its trade coverage is much lower than that of the US tariffs. The EU strategy therefore appears to be to maintain for now retaliation in the goods sector, while preparing to expand retaliation to services and procurement in case of further US escalation. The EU will also launch a WTO case against US reciprocal tariffs and auto tariffs.
In summary, therefore, there may be some scope for reaching an agreement focused on facilitating LNG imports and reinforcing regulatory cooperation. In the absence of a satisfactory solution on sector-specific tariffs, the EU would need to adopt rebalancing measures, while pursuing a WTO case against Trump’s 10% base tariff and US tariffs on cars and potentially other sectors. If the US ultimately introduces a 20% reciprocal tariff on the EU, full retaliation should be pursued, with the option to further increasing tariffs and introduce restrictions on services and procurement.
About the Author
Ignacio García Bercero is a Non-resident fellow at Bruegel.