The United States and European Union Reach New Trade Agreement

What Happened?

U.S. President Donald Trump and head of the European Commission Ursula von der Leyen announced a new trade agreement this week between the European Union and the United States. The new agreement includes a 15% tariff on most European exports to the United States, a pledge by the European Union to invest $600 billion in America, and tariff exemptions for several types of goods and services. 

Though the details are still being ironed out, the new 15% tariffs on European exports to the United States will take effect on August 1^st.

Why it Matters

The new agreement was reached less than a week before a Friday deadline for President Donald Trump’s higher tariff rates was set to kick in on goods exported from Europe. According to Bloomberg, futures for the S&P 500 rose 0.4% after the index notched five successive all-time highs last week. Contracts for European stocks gained 1% after the deal and the euro strengthened against the dollar.

For the Trump Administration the new trade agreement is a win, since many of the things sought by President Trump were delivered. While the Trump Administration didn’t get everything they wanted, they got most of it. The 15% tariffs on European exports are considerably higher than the current rates, which have been much lower for decades. 

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European countries were more relieved than pleased that the tariffs on exports to America weren’t higher than 15%, but that is much lower than the 50% rates President Trump had threatened to impose if a new agreement wasn’t reached. According to former U.S. trade negotiator Steve Olson ‘The EU sees value in healthy, robust and open North Atlantic trade relations; President Trump does not. That simple dynamic put the EU behind the eight ball throughout the negotiations.’

With two of the largest economies in the world, the U.S. and EU have a combined fifty trillion-dollar gross domestic product, meaning the new trade agreement affects an enormous volume of goods and services. Not everyone in Europe was happy with the deal, with many European trade groups criticizing the agreement as unfair and tilted towards the United States. But European leaders agreed to the terms mainly because they had little choice.

How it Affects You

The U.S. and the EU have a longstanding political alliance, but whether this deal will strengthen or weaken that partnership will take time to determine. 

Europe is the United States largest trading partner by volume, which means the new tariffs will impact a wide range of goods regularly purchased by American consumers. Consumers in the U.S. will now pay more for goods coming from Europe, because a tariff is just another term for a tax. Firms will simply pass some or all of those costs along to American consumers.