|
Swati Sood
3 August 2025 |
The following note was earlier published in The World This Week #322 Vol 7, No 31, 03 Aug 2025
What happened?
On 25 July, US President Donald Trump stated that there was a 50-50 chance that the US would reach a trade agreement with the EU.
On 27 July, Trump agreed on a trade deal with European Commission President Ursula von der Leyen, describing it as the “biggest deal ever made.”
On 28 July, various European leaders welcomed the deal, with EU Trade Commissioner Maros Sefcovic saying that this was “the best deal we could get under very difficult circumstances.” However, other European leaders criticised the deal. Italian Prime Minister Georgia Meloni stated that the agreement ensured stability but was incomplete with “a number of elements” missing in “particularly sensitive sectors” such as pharmaceuticals and the automobile industry. Countries with higher export volumes to the US, such as Germany and the Netherlands, welcomed the trade deal, whereas the French Prime Minister called it a “dark day” because Europe had resigned itself to “submission.”
On 31 July, Trump issued an executive order modifying tariff rates, imposing 0-15 per cent tariffs on goods imported from the EU.
What is the background?
First, a brief note on reciprocal tariffs and US-EU trade tensions. On 12 July, Trump announced that 30 per cent tariffs would be imposed on the EU, warning that any retaliatory tariffs would be added on top of the 30 per cent base rate. On 14 July, EU leaders responded by preparing counter-tariffs targeting US goods worth EUR 72 billion. On 17 July, Trump said that a deal was “possible.” On 18 July, President Trump threatened to impose tariffs of 15-20 per cent on all goods imported from the EU. The EU and the US share the world's largest bilateral trade relationship, with a trade volume of EUR 1.6 trillion in 2023. The EU is not just a critical supplier to the US but also the largest buyer of US natural gas and oil.
Second, the Trump-EU relationship. President Trump has advocated for ensuring US allies–including the EU–contribute to their partnership with the US on equal terms. A recurring point of contention has been the ‘imbalanced’ nature of the trade relationship between both economies. Last year, Trump stated that US allies are given military protection; however, they exploit the US in terms of trade. He argued that this will not continue anymore, declaring that the United States will be a “tariff nation.” In January 2025, Trump highlighted that the EU has been “very unfair” and that there are “some very big complaints with the EU,” calling it “nastier than China.”
Third, internal rifts within the EU. Member states within the EU remained divided over the response to reciprocal tariffs. France and Spain pushed for a tougher approach with immediate retaliation, while high export volume countries like Germany and the Netherlands urged caution and highlighted the importance of a deal with the United States.
Fourth, the EU’s dependence on China. 100 per cent of heavy rare earth elements in the EU are supplied by China, including terbium, samarium, and dysprosium. These critical raw materials (CRMs) are pivotal for producing permanent magnets used in electric vehicles, wind turbines, and advanced consumer electronics. Additionally, China is a major supplier of laptops, solar panels, and lithium-ion batteries, consisting of materials like lithium, cobalt, graphite, and gallium that are essential for the EU's digital and clean-energy transition. Thus, there were concerns within Europe that failure to reach a trade deal with the US could result in Chinese exporters pivoting towards unexplored market segments in Europe.
What does it mean?
First, the impact on the economy of the US and the EU. Tariffs imposed on imported EU goods will increase production costs and commodity prices in the United States. These inflationary pressures can reduce purchasing power and overall consumption, thereby worsening the cost-of-living crisis. Further, European goods will become more expensive and less competitive in the American market, potentially reducing EU exports. Low export volume will reduce production and wages, resulting in a marginal reduction in the EU’s GDP. On the other hand, the EU’s decision to drop tariffs on US goods will provide EU consumers and businesses with affordable goods. US exports with duty-free access to European markets will ensure a positive outlook for manufacturing and employment in the United States; however, high input costs due to expensive imports of raw materials from the EU could limit substantial gains.
Second, implications for EU-China relations. The US-EU trade deal reshapes the EU's economic ties with China. While the EU has sought to align itself strategically with the US, diversifying the supply of critical raw materials (CRMs) is an incremental process. If the US fails to meet European demand, the EU can find itself managing a dual dependence on the world’s two largest economies.
About the Author
Swati Sood is an undergraduate student in Political Science at the University of Delhi.
