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Faced with the threat of a full-blown trade war, the EU chose compromise over confrontation—accepting a 15 percent tariff deal with the US that, while painful, was ultimately seen as the lesser evil.
Image Source: Getty Images
On 27 July 2025, the European Union (EU) and the United States (US) arrived at a trade deal following months of tense exchanges between the two key trading partners, which had escalated after US President Donald Trump threatened to impose tariffs of 30 percent on European products in the absence of a trade deal by August 1.
Claiming that the EU was created to “screw” the US, Trump has long held grievances against the bloc on trade, primarily focusing on the latter’s trade surplus with the US in goods. In 2023, this surplus stood at €157 billion. Simultaneously, the EU had a trade deficit of €109 billion in services with the US, a factor that Trump has consistently overlooked.
Trump and European Commission President Ursula von der Leyen met at his golf resort in Scotland to flesh out, ironically in post-Brexit Britain, what is being touted as “the biggest deal ever”. Similar to the trade deal the US struck with Japan, the EU-US agreement imposes a 15 percent baseline tariff rate on most European exports.
Under the terms of the deal, the automotive sector — which has been a major bone of contention for Trump, based on his perception of the European market as being closed to American cars — is somewhat relieved, since the 15 percent tariff is a reduction from the 27.5 percent duty it was subjected to since April. Yet the 15 percent rate will disproportionately impact several industries, including automobiles that rely heavily on transatlantic trade. German companies such as Volkswagen and Mercedes-Benz, which export over 10 percent of their vehicles to the US, are likely to see an annual profit reduction of US$1.5–2 billion.
With regard to pharmaceuticals, on which Trump had threatened to levy tariffs of 200 percent in April, the situation remains ambiguous. High tariffs would result in increased prices for US consumers and healthcare providers, while particularly impacting pharma export hubs such as Ireland. Exports of steel and aluminium face uncertainty as well — Trump stated that these would continue to be subjected to 50 percent tariffs, whereas von der Leyen alluded to the establishment of a quota system for the metals sector. Meanwhile, the EU will maintain its tariffs on US agricultural imports that do not comply with the bloc’s regulations, while eliminating tariffs on certain farm products and agrifoods.
Products such as critical raw materials, aircraft and aircraft parts, certain chemicals, and some agricultural goods have received bilateral tariff exemptions in the form of zero tariffs. This list is expected to expand following further negotiations. Negotiations are also likely to continue with regard to the wine and spirits sector — currently subject to 15 percent tariffs and critical to several European countries, including France, Italy, Spain and the Netherlands.
Trump’s tariff threats had exposed the EU’s internal divisions on the best course of action, with countries like France urging tough measures and others, such as Germany — that are heavily reliant on exports — urging caution.
In exchange for lowered tariffs, the EU has committed to purchasing US$750 billion worth of US energy in the form of oil, natural gas, and nuclear fuel to replace Russian energy sources, while investing an additional US$600 billion into the US by the year 2028.
Trump’s tariff threats had exposed the EU’s internal divisions on the best course of action, with countries like France urging tough measures and others, such as Germany — that are heavily reliant on exports — urging caution. As a result, reactions to the deal varied — French Prime Minister François Bayrou called it “a dark day,” while German Chancellor Friedrich Merz lent cautious support to the deal. Italy, which has a trade surplus of €40 billion with the US, was keen to avert a deeper trade war. Meanwhile, Hungarian PM Viktor Orbán, a Trump ally, slammed the deal, saying “Donald Trump ate von der Leyen for breakfast”.
A 15 percent tariff rate will still serve as a major trade barrier, with negative consequences for transatlantic trade. While lower than the more recently threatened tariffs of 30 percent and the initial 20 percent, the current rate is still much higher than the pre-existing average 4.8 percent rate on European products. The 15 percent rate is also higher than Trump’s blanket 10 percent tariff, which the UK managed to secure through its own agreement with the US.
Yet, a no-deal scenario — which would have brought along 30 percent tariffs and may have pushed the EU “to the edge of recession” according to the consultancy Oxford Economics, as well as resulted in a full-scale trade war — has been averted for the time being. By delivering some stability and predictability for markets on both sides, the deal has at least temporarily eased transatlantic trade tensions. Therefore, while asymmetric and favouring US interests, the agreement is still being viewed as “the least bad alternative”. As Belgium’s Prime Minister Bart De Wever acknowledged, “This is a moment of relief, but not of celebration”. In the scenario that no deal could be agreed upon, Brussels was prepared with a list of countermeasures — targeting a wide range of US products worth €93 billion, with retaliatory tariffs of up to 30 percent.
As the contours of the transatlantic trade deal emerge, there are questions on whether a stronger response, reflecting the bloc’s economic power as a 450 million-strong consumer market, could have secured better concessions for the EU. Although the EU holds strong cards when it comes to trade, it was partially hamstrung by its dependence on the US for security guarantees and the need to prevent an American disengagement in Ukraine. The Federation of German Industries lamented the deal as an “inadequate compromise that sends a disastrous signal”, warning that the tariffs are likely to impact economic growth, competitiveness, and inflation rates in Europe. The Institute of International Political Studies (ISPI), for instance, estimates that Italy’s GDP may contract by 0.2 percent as a result of the 15 percent tariffs.
Although the EU holds strong cards when it comes to trade, it was partially hamstrung by its dependence on the US for security guarantees and the need to prevent an American disengagement in Ukraine.
Notably, there are key discrepancies in the White House’s version of the deal, published in the form of a Factsheet, and the European Commission’s readout of events. For instance, while the Factsheet mentions the EU’s agreement to purchase “significant amounts of US military equipment,” the bloc’s statement does not reference this. A commitment of this nature would be fundamentally at odds with the Commission’s recently outlined defence initiatives aimed at domestic industrialisation in the defence sector. Regarding the US$600 billion investment, unlike the more definitive language used in the White House Factsheet, the EU statement merely notes that “companies have expressed interest” towards this end. Either way, this is not a guarantee, as such investments will depend on the private sector.
The absence of a joint statement is another caveat, especially given Trump’s penchant for unpredictable spins — posing unique challenges for an entity like the EU — which holds exclusive competence on cutting trade deals, but must consult with its 27 member states. The EU was, in fact, already close to reaching a deal with the US before it was suddenly threatened with additional tariffs.
With sectoral tariffs and other key aspects still to be fleshed out, the negotiations are likely to continue. Yet, as the deal awaits approval by EU member states before it goes into effect, it will have profound consequences for the world’s largest trading relationship, which was worth €1.6 trillion in 2024.
Shairee Malhotra is the Deputy Director of the Strategic Studies Programme at the Observer Research Foundation.
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Shairee Malhotra is Deputy Director - Strategic Studies Programme at the Observer Research Foundation. Her areas of work include Indian foreign policy with a focus on ...
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