I Coulda Made a Better Deal

What, exactly, did Trump get from Europe?

First off: two more of my inequality primers are now free at the Stone Center web site. The list so far:

Why did the rich pull away from the rest?

The importance of worker power

A Trumpian diversion

Oligarchs and the rise of mega-fortunes

Now, on to current events.

Trump has now announced a trade “deal” with the European Union that looks a lot like the “deal” he made with Japan. I use scare quotes because there is little sign of a quid pro quo. The United States is imposing a 15 percent tariff that is lower than previously threatened, but still vastly higher than we had before Trump. Overall U.S. tariffs seem likely to settle roughly at the level that prevailed after the infamous Smoot-Hawley tariff of 1930.

In return we got a vague promise of higher European investment in the United States. When Japan made a similar promise last week, administration officials asserted that this would mean hundreds of billions flowing into rebuilding U.S. industry. Japanese officials, however, say that the money will consist almost entirely of loans and loan guarantees. This strongly suggests that Japan will, if it does anything at all, simply be sticking Trump’s name on money flows that would have happened anyway. There’s every reason to suspect that the same will be true of whatever the EU does.

And like the Japan deal, this deal seems to place lower tariffs on cars made in Europe, which have very little U.S. content, than on cars made in Canada, which contain many American parts. Add in the punishing tariffs on steel and aluminum, and Trump’s trade policy seems, if anything, to be tilting the playing field against U.S. manufacturing.

When I point out that Trump’s idea of trade deals seems counterproductive even in terms of his claimed goal of boosting manufacturing, I get some pushback from readers along these lines: “Oh, yeah? If you’re such an expert on trade negotiations, tell me what deal you think you could have made.”

OK, I can answer that. If I had been in charge of negotiating with the European Union, I would have been able to get a deal with the following components:

· Very low tariffs on U.S. exports of manufactured goods to Europe, on the order of 1 percent

· Near balance in bilateral trade, with U.S. exports to Europe close to 90 percent of our imports from Europe

· U.S. companies allowed to operate freely in Europe, earning hundreds of billions a year in profits

· European corporations investing more than $150 billion a year — real investment, not loans — in the United States

Why do I believe that I could have negotiated a deal like that? Because that’s what U.S.-EU international transactions actually looked like in 2024. So that’s what we could have gotten by doing nothing.

Before Trump returned to power, U.S. nonagricultural exports to the EU faced an average tariff rate — that’s the number “MFN AVG of traded TL” in this table — of 1 percent. As for U.S. transactions with Europe, they looked like this:

Source: Bureau of Economic Analysis

If the trade imbalance looks smaller than the numbers you may have heard, that’s because Trump likes to talk about trade balances in goods, but ignores the fact that America runs a substantial trade surplus in services. If you include both goods and services — and why wouldn’t you? — U.S.-Europe trade is fairly close to balance.

But if the US-EU trade relationship was more or less OK last year, why did Trump impose huge tariffs and leave many of them in place even after the so-called deal? Because he felt like it. You won’t get anywhere in understanding the trade war if you insist on believing that Trump’s tariffs are a response to any legitimate grievances. And he failed to gain any significant concessions, mainly because Europe was already behaving well and had nothing to concede.

So was the US-EU trade deal basically a nothingburger? (Substitute some European food for burger, if you like.) No, it was a bad thing, but mainly for political reasons.

1. Trump probably believes he won, which will just encourage him to persist with his trade war.

2. This will hurt the world economy, with the burden falling mainly on lower-income Americans. The Yale Budget Lab estimates that Trump’s tariffs will leave the U.S. economy 0.4 percent poorer in the long run, which is very close to my own back-of-the-envelope calculations. But the tariffs are basically a sales tax that will reduce real income for poor and working-class families by about 1.5 percent, even as cuts in other taxes raise income for the wealthy.

3. European negotiators didn’t make many substantive concessions, but they pretended to give ground — and they didn’t retaliate, even though they were clearly entitled to do so, because the U.S. has just gone back on all its solemn past agreements. This makes the EU look weak, which is a bad omen for its ability to deal with real challenges, starting with helping Ukraine.

Two less discouraging aspects of what just happened: First, Trump appears to have backed down on the idea of treating European value-added taxes as an unfair barrier to U.S. exports (which they aren’t, but facts don’t matter here.) So that’s one potentially awful confrontation avoided, at least for now.

Second, if this trade deal was in part an attempt to drive Epstein from the top of the news, my sense of the news flow is that it has been a complete flop.

Still, if I were a European I’d be very angry at anything that even looks like Trump appeasement. The EU is an economic superpower, especially if it allies itself with the UK. It needs to start acting like it.

NONMUSICAL CODA

Live shot of US trade policy