Another week on the international Trade Rollercoaster
US and EU trade negotiations
Last week started with the EU’s bombshell retort to the US-UK Economic Prosperity Deal: the US can make whatever deal it likes with the UK, but the EU will still be controlling access to the UK agriculture and food market. This was a seemingly devastating blow to the hopes of the US and UK agreeing a full trade agreement.
However, the EU underestimated its opponent; the US struck back by raising the stakes to a 50% tariff on all EU goods not covered by the US Section 232 tariffs on steel, aluminium, and cars.
In the nick of time, the US Court of International Trade came to the EU’s aid by declaring all of the President's emergency tariffs under the International Emergency Economic Powers Act (IEEPA) to be illegal. This won’t help the EU’s industrial exports, which mainly fall under the Section 232 tariffs. However, the removal of Trump’s 50% tariff threat will benefit the EU’s Luxury goods, wine and olive oil exporters.
The President has appealed the court’s decision, claiming it is political. Not an unreasonable claim, as while Democratic states Arizona and Oregon, with support from New York, California, Illinois and Washington, are using the US Court of International Trade to remove taxes on imported goods. Senators and Congresspeople from the same states are opposing Trump’s One Big Beautiful (tax-cutting) Bill in Congress. How does this make sense? The Democrats are opposing tax cuts for businesses, as well as tax-free overtime and tips, but also oppose tax increases on imported consumer goods.
The US Court of Appeals for the Federal Circuit has paused the trade court’s ruling while the appeal takes place. The next hearing is scheduled to start on June 5th, and in all likelihood, this dispute will eventually reach the US Supreme Court.
What constitutes an emergency?
Trump believes that the US trade deficit constitutes a national emergency, which justifies the IEEPA tariffs of 10% or higher to reduce the US trade deficit. Critics claim that IEEPA is intended for combating terrorism, imposing sanctions, or addressing other emergencies. The trade court claimed that the President doesn’t have the authority to implement these tariffs under the IEEPA Act.
In Trump's defence, while the courts may not see the US’s ballooning goods trade deficit as an emergency, it has been growing for over 20 years and was $1.2 trillion in 2024. The new tariffs have at least helped reduce the projected US budget deficit of $1.9 trillion in fiscal year 2025, by raising over $92 billion in tariff revenue since January. Tariff receipts in May, which included the IEEPA tariffs, totalled $22 billion.
However, the increased tariffs haven’t fixed the US trade deficit, as the threat of tariffs encouraged major stockpiling of imported goods and parts, especially in homogeneous goods and parts that even a 10% tariff would make uncompetitive. For example, US monthly imports of EU Organic Chemicals averaged at about $2.8 billion before 2025. This amount increased by 3.5 times in both January and February 2025 and was 7.6 times larger in March, making Organic Chemicals the most valuable EU good imported by the US in March, ahead of Pharmaceuticals, Machinery, and Vehicles, which are traditionally the EU’s most valuable exports to the US.
In total, across all supplying countries, the US goods trade deficit increased by 27% between the fourth quarter of 2024 and the first quarter of 2025, an increase of $95 billion. The Goods sectors with the largest deficits are Machinery (HS84), Precious metals and stones (HS 71), Electrical machinery and parts (HS85), Vehicles (HS 87), Pharmaceuticals (HS 30), and Organic chemicals (HS 29). Meanwhile the US runs trade surpluses in Aircraft (HS 88), Fuels (HS 27), Cereals (HS10), Oil seeds (HS 12), Miscellaneous chemicals (HS 38), Food waste and residues (HS 23), Cotton (HS 52), Meat (HS 02), Wood pulp and waste (HS 47), Dairy products (HS 04), and Ores (HS 26).
With the exception of Aircraft, the US has become a net exporter of raw materials and primary products and a net importer of machinery, electrical goods and pharmaceuticals. This is something that President Trump wants to invert, but so far, stockpiling of machinery, parts and nonperishable goods is delaying the eventual transition.
The first-quarter surge in imports is also reportedly the cause of a 0.2% lower estimate of first-quarter GDP. However, it is unlikely that this import surge will be repeated in Q2, even with only 10% IEEPA tariffs. If the Administration loses the IEEPA court case, it could trigger an import surge in Q3 while the Administration continues the process of converting the IEEPA tariffs into Section 201, 301, or 232 tariffs.
Not much exporter relief
However, foreign exporters should understand that the trade court ruling only covers the ‘retaliatory’ tariffs and the base level 10% tariffs. It doesn’t change the tariffs on aluminium, steel, cars, solar panels, etc., which fall under Sections 201 and 301 of the Trade Act of 1974, or Section 232 of the Trade Expansion Act of 1962; these will all remain in place.
Foreign exporters also shouldn’t imagine that if the Administration loses the appeal, the US’s ‘reciprocal tariffs’ will vanish. Trump’s advisers have already suggested that they will simply replace the IEEPA tariffs with Section 201, 301 or 232 tariffs.
To reiterate this point, President Trump then upped the ante by increasing the tariffs on steel products from 25% to 50%. Anyone imagining that the court's ruling against the IEEPA tariffs will make US tariffs go away should think again. And it may get worse if the ongoing investigation into pharmaceutical products, semiconductors, critical minerals, lumber, trucks, aircraft and goods made of copper also results in the imposition of Section 232 tariffs. Additionally, the USTR is investigating under Section 301, Foreign Digital Services Taxes, which will affect the UK as well as Austria, France, Italy and Spain.
So, what is happening with the EU trade negotiations?
According to Scott Bessent, the US Secretary of the Treasury, the threat of being clobbered with 50% tariffs in July or having the threat of similar tariffs hanging over its economies during a lengthy Section 232 process, has brought the EU back to the negotiating table.
However, incredibly, with their usual hubris, EU officials claim that the legality issue surrounding the reciprocal tariffs gives them leverage; they obviously haven’t examined their exports to the US or don’t understand the difference between the various US tariffs.
US imports from the EU in 2024 were worth over $600 billion: 7% of this value was for cars that now have 25% tariffs applied to them, and 16% were steel and aluminium goods that now have 50% tariffs applied to them. These tariffs are not going away and will reduce EU exports of cars, while EU goods made of steel or aluminium are unlikely to be exported to the US at all, while the 50% tariffs are in place.
However, this pales in comparison to the devastation that would be inflicted on EU exports to the US if the US chooses to impose a Section 232 tariff on pharmaceuticals. Pharmaceuticals accounted for approximately 20% of EU exports to the US in 2024. Most of the other goods presently under a Section 232 review are not significant exports. However, totalling Pharmaceuticals, Aluminium (including aircraft parts), Steel, and Cars, over 45% of current EU exports to the US could be affected by Section 232 tariffs of 25% or 50%.
Maros Sefcovic, the European Commissioner for Trade, claims the EU wanted a ‘zero for zero’ trade agreement with the US for cars, pharmaceuticals, rubber, plastic, machinery and other industrial products. He also stated that the EU would not alter its VAT, Digital Tax, or its ‘food safety standards’ to achieve this.
EU ‘food safety standards’ equate to ‘food non-tariff barriers’ in any other language. Attempting to achieve a trade agreement while also retaining non-tariff barriers to agricultural trade is likely to simply annoy the US, which, as mentioned above, has become a net exporter of raw materials and primary agricultural produce.
It could also backfire on the UK, which has stupidly agreed, at least in principle, to allow the EU to set its agricultural regulations and food standards. Allowing the EU to make UK regulations was never a good idea, but Starmer’s ‘Reset’ now looks more like a suicide pact when it comes to US trade.
The UK has managed to agree a trade deal with the US that removes the US 25% tariffs on UK cars, steel and aluminium products, while the UK has agreed to drop its tariffs on US ethanol imports and on a small amount of beef. Why allow the EU to upset this arrangement with the US, which will benefit the UK's largest export manufacturers, for only a small reduction in the paperwork of a handful of already very profitable supermarkets?
EU tariffs on food and agricultural products are exceptionally high and are higher on many common foods than Trump's original threat to add an additional 20% tariff on all EU goods. The average applied EU tariff on beef was 29% in 2024, Whey was 38%, olive oil 27%, Sugar 29%, and mushrooms 38.5%. But it is the EU’s non-tariff barriers that have really upset the US.
The USTR report on Foreign Trade Barriers devotes 32 pages to EU trade barriers, approximately half of which pertain to agriculture. The USTR is concerned by the EU’s overly cautious approach to new technologies, its lengthy approval processes, and the fact that it can take years for the European Commission to approve the use of substances that have been evaluated as safe by the European Food Safety Authority. The EU frequently changes its certification requirements, making the export of goods with the correct certificate difficult. The EU disregards Codex Alimentarius guidance and does not recognise recommendations from the World Organisation for Animal Health. Yet, it has failed to provide scientific evidence to justify its own standards. It is hard to read the USTR’s list of complaints about the EU agricultural regulations and believe that allowing the EU to make the UK’s agricultural rules was a clever move.
Industry takes the wheel
Luckily, German industrialists are finally realising that the EU does not have their best interests at heart and are doing their own negotiations. Reuters reports that the US is bypassing the EU officials and negotiating directly with Germany’s carmakers. German newspaper, Sueddeutsche Zeitung, backs up this report, claiming that the CEO of Volkswagen, Oliver Blume, was conducting ‘fair and constructive’ talks with the US government on tariffs and further investments in the US. BMW, Mercedes-Benz and Volkswagen all have assembly plants in the US, but they rely on imported parts. This is also true of Airbus, which assembles aircraft in Alabama with parts imported from France, Germany, and ‘tariff-free’ parts from the UK. Even EU luxury goods makers, Louis Vuitton and Hermes, produce some goods in the US but using imported materials from Europe.
All of these companies have realised the importance of getting a trade deal with the US. This will be especially concerning for Germany, which has built its economy around exporting goods. Only the EU Commission would think they are in a position to dictate terms to the US on agriculture. In 2024, only 3% of the goods the US imported from the EU were food, fodder or live animals, while alcohol added a further 2%. Only the EU would risk 45% of its exports to the US to protect its inefficient farmers from competition and harm EU consumers.
Changing the world’s expectations
Some journalists are claiming that any agreed level of tariffs below Trump's opening offer is an example of Trump ‘chickening out’. Obviously, these journalists have never been to a Souk or even traded in the stock market, where the eventual strike price is always between the bid and the offer.
Rather than chickening out, the President has changed everyone’s attitude to tariffs. Once upon a time, the suggestion that the US would increase its very low tariffs to 10% would have been unthinkable; now, a 10% tariff would be a relief and something everyone could live with.
But in the EU’s case, Trump originally announced a 20% rate for his reciprocal tariffs on the EU, then lowered this to 10% to allow trade negotiations to take place. When the negotiations stalled, he threatened to increase the tariffs to 50% starting in June. This helped the EU overcome its objections, and the lower 10% rate has been extended until July for further negotiations; however, the EU isn’t in a strong position. They rely on the US market to sell their expensive products that are out of the price range of most other markets.
Ironically, most economists now accept the imposition of the 10% IEEPA tariffs, realising that, as I said over a month ago, these are much smaller than most other countries’ GST or the EU’s VAT, which is added (and then reimbursed) at every level of production finishing as a non-refundable addition to the final retail price. In contrast, import duties are only applied to the import price, which for most consumer goods is only a small fraction of the eventual retail price. And yet, it is this 10% tariff that the courts have struck down, rather than the much more destructive 25% Section 232 tariffs. That said, the 25% tariffs are on goods that really should be manufactured in the US for national security reasons, and if a 25% tariff achieves this aim, then so be it.