Trump’s EU trade deal has unintended consequences

Agreeing to buy energy from the US was a no-brainer for the EU and Japan, given their reliance on imported energy.

The EU, which ended its purchases of Russian gas after the invasion of Ukraine, now imports about half its LNG from the US. LNG is a commodity traded at global market prices, so there is no financial penalty for the EU in sourcing more gas from the US. Perversely, however, there could be an adverse impact on the US – its increased exports of LNG in recent years have flowed through to higher US domestic gas prices.

The deals that may underpin this new global trade order have been hastily and clumsily negotiated, are half-formed and have unintended consequences for American companies, consumers and the US economy.

The promise, if there is one, to invest $US600 billion in the US was vague and one whose delivery is beyond the EU’s control. It is individual European companies that would have to decide whether or not to invest.

Unlike the deal with Japan, where Trump claimed the Japanese would invest $US550 billion in a fund from which the US would get 90 per cent of the profits, the investment agreement with the EU appears just a broad statement of intent.

Trump and his administration have a tendency to over-egg their accomplishments. The Japanese version of what they have agreed to, for instance, varies significantly from what Trump has described.

The Japanese have agreed to provide equity, loans and loan guarantees for investments in the US, but government officials say any profits would be split according to the level of contributions made and that the final degree of profit-sharing would rest with the private sector companies involved and the returns they required.

It would appear the Japanese envisage their state agencies mainly facilitating debt funding for US projects, with the decisions on which projects to pursue and the apportionment of profits left to the Japanese and US companies involved.

Trump said Japan would invest, “at my discretion,” the $US550 billion but, as is the case with the EU, he can’t force Japanese companies to invest.

It should be noted that the presentation card on Trump’s desk that outlined the investment agreement originally said Japan would invest $US400 billion, but the “$400B” was crossed out with a marker pen (a Sharpie, perhaps) and altered to $US500 billion.

When Trump announced the detail, in a post on Truth Social, it had suddenly become $US550 billion. It is unclear whether the Japanese were consulted on the revisions.

What that episode demonstrates is how rushed the trade deals have been as the administration tries to demonstrate that the threat of Trump’s “reciprocal” tariffs has been successful in forcing other countries to accept Trump’s terms before the 90-day delay before those tariffs are imposed expires on August 1.

That’s why there are obvious blank pages in the EU and Japanese deals to be filled in before they remotely resemble a fully-detailed trade agreement.

It’s also why, as is the case with Australia’s recent decision to allow more imports of American processed beef, the outcome of the agreements will depend, not on what Trump decrees or the EU and Japanese trade negotiators have agreed to, but on companies and consumers within the markets that the US says it is opening up.

The Japanese won’t buy any meaningful volume of US SUVs and pick-up trucks. There is no market for them in Japan and the American auto companies aren’t going to re-tool in order to produce a few gas-guzzling right-hand drive vehicles.

Trump mused that the Europeans would enjoy those SUVs and pick-ups. He doesn’t appreciate that there are significant cultural differences between Europeans and Americans and that it is improbable that the narrow and congested streetscapes in European cities are suddenly going to be littered with over-sized US vehicles.

The 15 per cent tariff on European auto and auto part exports is, however, a big win for the Europeans, as were the same tariff concessions won by the Japanese.

The EU and Japanese carmakers don’t face tariffs on their raw materials, like steel and aluminium, or components. Their US counterparts, which are heavily integrated into a North American auto industry, with cars and components flowing across the borders with Mexico and Canada, do.

Thanks to Trump, who has imposed 25 per cent duties on imports of steel, aluminium, auto parts and those components of US autos not made within the US, the European and Japanese companies will have a material competitive advantage over America’s own carmakers.

The fact that the two key trading partners, both heavily reliant on the auto industry, were able to win such advantages for their companies says that, in its haste to proclaim that Trump’s tariffs threats have produced results, the administration hasn’t looked at the complex ways the deals interact with America’s own industries and their supply chains.

It does seem rather bizarre that Trump is using the threat of punitive tariffs to bludgeon other countries into trade deals that gives their key industries what is effectively a tariff advantage over his own.

He and his advisers also don’t appear to appreciate that allowing tariff-free imports of products from the US is irrelevant if consumers aren’t going to buy what the US is selling or, as is the case with the 100 Boeing aircraft that Japan agreed to buy, if the US companies can’t deliver what the countries have agreed to buy. Boeing’s current backlog of orders is about 6000 planes, or nearly 17 years of production at the rate at which it delivered planes last year.

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The deals that may underpin this new global trade order have been hastily and clumsily negotiated, are half-formed and have unintended consequences for American companies, consumers and the US economy. So much for the art of the deal.

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