EU Preparing Retaliation to US Tariff Plan

The European Union’s and the United States’ stances against one another are sharpening as the tariff deadline approaches. On the 1st of August, the US is set to implement a 30% levy on European products.

As a response, the EU is searching for counter-measure options. This mutually antagonistic stance could possibly harm the most robust global trade relationship. Key assets for forex traders, such as USD and EUR pairs, can be significantly affected. Safe-haven assets like gold and JPY pairs may also react as global trade tensions rise.

Formerly, the USD would fall into the safe haven group, but due to US President Donald Trump’s volatile policymaking, it has lost some of that status. Investors and traders are more likely to choose assets with a more proven structure and stability.

The chances of an acceptable agreement are decaying, as the US looks firm in its stance, and the EU becomes more and more confident in a retaliatory measure. The United States may continue its economic hostility. Trump has made it clear that retaliatory measures will not be tolerated.

This article will explore the details of the current trade hostilities and the possible outcomes for forex and CFD traders.

Tensions rising

US stands firm on August 1st tariff deadline

Despite the European Union’s efforts to create an amicable deal, the US stands firm on its 1st of August deadline for a 30% tariff. US Commerce Secretary Howard Lutnick said a deal is possible. However, it will only happen after the 30% tariff is implemented.

Hard deadline and continued negotiations

He noted that it’s a hard deadline. The new levy rates start on August 1st. Negotiations may continue after that. Lutnick seems confident that the EU and US will reach a deal, noting that it’s the biggest trading partnership in the world.

EU pushes anti-coercion measures

However, the European Union doesn’t seem content with sitting on its hands. EU member countries are increasingly in favour of introducing a wide range of anti-coercion measures. These would allow the bloc to target particular US service and industry segments or prevent it from accessing public segments.

European Commission proposes 10% tariff deal

As a middle ground, the European Commission, the body in charge of negotiating trade agreements for the EU, has proposed a deal with 10% US tariff on a majority of its exports.

The European Commission, which negotiates trade agreements on behalf of the 27-member bloc, had appeared on course for an agreement in which the EU would still have faced a 10% U.S. tariff on most of its exports, with some concessions.

Concerns over 30% tariff impact

The European Commissioner for Trade and Economic Security, Martin Sefcovic, said that a 30% tariff would practically lock trade with the US.

He also noted some frustration with the process itself, noting that US counterparts have offered conflicting solutions. It appears that there isn’t anyone who could offer a clear stance on what Trump would accept.

Limited prospects for removing key tariffs

The prospects of removing key tariffs, such as 50% on steel and aluminium and 25% on automobile parts, however, remain limited.

This could have a significant impact on non-precious metal prices and EU car manufacturer shares. Lutnick has dismissed the notion of the EU implementing similar levies on key US products.

EU-US negotiation course and potential outcomes

Negotiations continue Amid Firm Stances

While both sides are firm in their stances, the negotiations between them are continuing. The EU hopes to negotiate a more beneficial tariff policy, modelled on the UK policy with a baseline 10% levy.

EU-US trade overview

The total EU-US trade in 2024 equals 1.68 trillion euros or 1.96 trillion dollars, according to the European Council.

Here, the EU is in a goods surplus, while the US provides more in services. When these two are subtracted, the EU remains in a 50 billion euro surplus.

Trump’s tariff demands

According to the Financial Times, Trump is adamant on a minimum tariff of between 15% and 20% on all EU imports.

In a sentiment that hurts Germany, a major car exporter, in particular, there seems little room to debate the 25% auto sector levy.

Shifting EU diplomacy

This has caused a mood shift in EU countries. More and more EU diplomats seem content to react, even though they would prefer fruitful negotiations.

This excludes Hungary’s president Viktor Orban, who is aligning himself with Trump.

EU’s tariff package prepared

The EU bloc has prepared a tariff package that would hit US goods worth 21 billion euros. The package is currently suspended and will go into action on the 6th of August.

It is still deciding on further levies that would expand this package, covering another 72 billion in various exports. These potential taxes cover a wide range of industries, including clothing, agriculture, and food and beverages.

Anti-Coercion Instrument (ACI) at the center

EU’s anti-coercion instrument (ACI), first developed with China in mind, is at the center of discussions. The plan allows the bloc to react to external countries attempting to pressure the EU economically.

Potential use of ACI against US services

EU leaders are considering using the ACI to hit US services, in which it has a surplus. This would also limit public tender access, with tenders bringing forward around 2 trillion euros per year.

Further measures under consideration

Further measures would include intellectual property rights, which would impact the entertainment sphere. Additionally, the EU may implement restrictions on US chemicals and further limit the import of food products.

France leads calls to invoke ACI

France is spearheading the calls to invoke the ACI, but others have, until now, taken a more reserved stance on what they deem a drastic measure.

The apprehension is stemming from Trump’s warning that he will retaliate against countries that take action against the US. The European Commission would need a qualified majority of 15 countries to invoke the ACI.

Potential market impacts

As noted, the US-EU trade relationship is the biggest in the world. A shakeup could cause seismic shifts in the trading landscape, with it being nearly impossible to predict the outcomes, as both entities would scramble to make up for lost ground elsewhere.

US markets look confident in Trump’s plan, with the S&P reaching a record close on Monday, the 21st of July, at 6,305.60.

Meanwhile, the European economy seems to be holding up well, with EUR/USD showing a significant year-to-date gain.

However, it’s clear that markets are feeling wary, with multiple safe-haven assets such as gold reaching record highs during Trump’s second term.

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