U.S.-EU Trade Deal Avoids a Tariff War, but Deepens European Dependence

Matthias Matthijs is senior fellow for Europe at the Council on Foreign Relations.

After months of negotiations, the United States and the European Union (EU) announced a trade deal on July 27 that aims to avoid a wider trade war between two of the world’s largest economies. The agreement will see a 15 percent tariff imposed on nearly all EU imports—half the amount U.S. President Donald Trump had threatened, but more than triple the average 4.8 percent that European goods faced before Trump took office in January. The deal has been met with dismay by some European leaders, with critics arguing it disproportionately favors the United States, and details about levies on some sectors remain to be worked out. 

Below, CFR turned to Senior Fellow Matthias Matthijs to unpack the details and ambiguities of the U.S.-EU trade deal. 

To get the ball rolling, walk us through these final days. The EU was staring down 30 percent tariffs and the final deal levied 15 percent. What may have changed in each party’s negotiation calculations to make this possible?  

The negotiations between the EU and the United States to find a new political balance on their bilateral trade relations have been a rollercoaster ride since Trump introduced his so-called reciprocal tariffs in the Rose Garden on April 2—a day he called “Liberation Day.” 

The EU approached negotiations from the point of view that any deal with the Americans had to be fair and balanced and take into account the fact that both sides were roughly equal in economic size. EU officials were therefore quick to dismiss the deal the United Kingdom (UK) concluded back in May as a “bad deal” and they saw the 10 percent reciprocal tariff imposed by the United States (and agreed to by the UK) as unacceptable. But after Trump threatened to hit the bloc with a 50 percent tariff in late May, the EU switched gears and resigned itself to the asymmetric nature of any future deal—i.e. the United States would be the clear winner and the EU would have to make significant concessions. 

Complicating matters is the fact that EU member states were split on which tactics to follow. France and Spain favored a tougher approach with immediate retaliation after new tariffs were imposed, while Germany and Italy urged caution and the importance of a deal with the United States. The latter won out and the EU started to put all kinds of things on the table: lower tariffs for American car producers; lower non-tariff barriers for American companies; new purchases of American liquified natural gas (LNG), weapons, and agricultural products; and more European private investment in the U.S. economy. A deal that proposed a 10 percent tariff (reflecting all those concessions) was on Trump’s desk by July 10, but the president rejected it two days later and instead issued a letter threatening 30 percent tariffs by August 1. 

The situation looked hopeless by mid-July, as the Europeans started to prepare for a “no deal” scenario and got serious about retaliation. However, the dynamic shifted after the Japanese struck a trade deal with the Americans just before an EU-Japan trade summit in Tokyo on July 22. Trump has always had a knack for timing, and the new developments with Japan energized U.S.-EU negotiations, with the two sides eventually settling on a 15 percent baseline tariff. The framework includes the same 15 percent tariffs on cars and car parts and carve-outs for other sensitive products, including medical devices, certain chemicals, and aviation. 

In the end, the deal agreed to by Trump and European Commission President Ursula von der Leyen in Scotland on July 27 was not that different from the one that was on Trump’s desk on July 10. 

European leaders have offered divergent reactions to the deal. What do the mixed reactions reveal about Europe’s strategic anxiety when it comes to its relationship with the United States? 

Most leaders have reacted with a huge sigh of relief, as very few EU leaders were willing to go down the route of escalatory tariff retaliations, potentially resulting in a full-blown transatlantic trade war. Germany finds solace in the fact that car tariffs are coming down from 27.5 percent to 15 percent, providing immediate relief for the country’s automotive industry. France and Italy are still working on securing exemptions for wine and spirits and other important export products. In Belgium and Ireland, policymakers are placated that their pharmaceutical products will not face a higher tariff than 15 percent once new sectoral tariffs (under section 232) come into force, which is expected in the coming weeks. Finally, in Eastern Europe, most leaders are happy that a rupture between the United States and the EU over trade has been avoided, which might have jeopardized U.S. support for the war effort in Ukraine against Russia, and broader security guarantees through NATO. 

All that relief aside, there is a realization that the EU has caved to the whims of an unpredictable U.S. president, both on NATO defense spending and now also on international trade. The Europeans have gone from living in a secure and prosperous continent quasi rent free, courtesy of a benign American hegemon, to living in a more dangerous and uncertain continent at significant cost. Many leaders believe that the efforts set in motion at the EU level to develop more strategic tools—including their much-touted Anti-Coercion Instrument—have not resulted in a more balanced relationship with the United States. If anything, the results of the NATO summit in The Hague and the recent Scotland trade deal make Europe even more dependent on the United States. Whereas Europeans in the 2000s and 2010s outsourced their energy needs to Russia, their security to the United States, and their growth (through exports) to China, today they are dependent on the United States for all three. 

With regard to the deal’s relative imbalance, the EU has agreed to pay large sums for U.S. defense equipment and energy products. What is Brussels’ justification for agreeing to this? Is this merely to appease Trump? 

The coming together of the U.S. trade deal with Japan shortly after their elections underscored that Japan’s promise to invest $550 billion into a U.S. sovereign wealth fund was critical to sealing the deal—something U.S. negotiators made abundantly clear to the EU trade team. The promise to buy up to $750 billion of U.S. LNG, oil, and nuclear products in the next three years, as well as the promise by EU companies to invest at least $600 billion in the United States economy, had long been on the table. These two promises will likely be the hardest to enforce.  

That said, the European Commission understood that most U.S. trade deals have a significant element of “buying American” and “investing in America.” A big chunk of those amounts would have been spent and invested anyway, as the EU has become more reliant on American LNG since the 2022 Russian invasion of Ukraine, and private European companies already invest trillions of dollars in the U.S. economy annually, whether a deal is signed or not.  

There are also some tariff rates still to be negotiated. How significant are these “unknowns” and how much could they alter the overall impact of the trade deal?  

The nature of doing trade “deals” with Trump is that these are not traditional free trade “agreements”—which take years to negotiate in painstaking detail—but commitments (often unwritten or based on a simple handshake) that must be worked out further later or can be revisited in the future. It also often happens that the two sides have fundamentally different interpretations of what has been agreed to. 

For example, the Europeans are quick to emphasize that the new U.S. 15 percent tariff rate is a “ceiling,” while the Trump administration maintains it always reserves the right to increase those tariffs in the future. The tariffs on steel and aluminum remain at 50 percent for now, until a deal can be worked out that will address global steel production overcapacity, which basically means a closer alignment between the United States and the EU on economic security and China policy. Finally, on pharmaceuticals, it is the EU’s understanding that 15 percent tariffs will apply if there are new, higher (say 25 percent) tariffs on imports of pharmaceutical products, while the U.S. interpretation is that everything remains on the table when it comes to that sector.  

I think that this is simply part of the design of U.S. trade policy under Trump—there will always be an element of uncertainty, which the American president believes gives the United States more leverage in future negotiations. It is a major irritant that all countries and businesses will need to learn to live with over the next three-and-a-half years, whether they like it or not. 

Zooming out, how seismic of a change will this be to the U.S.-EU trade relationship? How does it impact Europe’s desire to be less dependent on the United States?  

In the short term, the deal makes the EU more reliant on the United States for both trade and defense. While the EU Commission and prominent EU leaders are quick to stress that this is the best deal they could have gotten, there will be plenty of criticism from opposition parties all over the bloc—especially from Euroskeptic parties of both the far left and the far right. The latter will argue that the EU has outlived its purpose and that individual member states could have negotiated better deals with the United States, as the UK was able to do, which many pro-Brexit UK politicians are touting as the “Brexit dividend.”  

In the medium to long term, the deal will probably increase Europe’s desire to become more independent from the United States. Many initiatives at the EU level have already been set in motion to make the EU more sovereign— from developing an EU military-industrial complex to expanding their geoeconomic toolbox. It has also created a desire to develop closer trading relationships with other, like-minded countries, including Australia, Canada, India, Japan, and South Korea. The agreement between the EU and Mercosur—concluded after almost two decades of negotiations—probably has a better chance of being ratified in the next few months than it did six months ago. 

In the end, the Europeans applied the “first, do no harm” principle to their trade relations with the United States, meaning they avoided raising tariffs on their own citizens (or ending up with even higher tariffs for their exporters) by staving off a trade war. Just because Trump believes that a 15 percent tax on U.S. imports will benefit average Americans, does not mean the Europeans must go down this road of increased trade protectionism. 

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.