"The biggest deal ever made"

Who wins the U.S.-EU trade deal?

The United States and the European Commission announced they have reached a “framework trade agreement.” The mechanics, timeline for finalization, and implementation of the deal are yet to be determined. The EU and U.S. will issue a joint statement on August 1st to outline the formal elements of the deal. The U.S. will presumably enforce the agreement via executive order (the long-term legality of which is unclear). The European Commission will translate the joint statement into legally binding terms, which will then require ratification by a majority of EU countries. European Commission Ursula von der Leyen — who is catching a ton of flak for looking weak — said she expects the deal will last until the end of the Trump presidency.

While we await the formal statement, we know from both sides at least some of the elements of what has been agreed to. They include:

• With some exceptions, EU goods entering the U.S. will be subject to a 15% baseline tariff. (President Trump had threatened 30% tariffs effective August 1st absent a deal.) The tariff will ultimately cover about 70 percent of EU exports.

• Cars and car parts will be subject to the 15% tariff, compared to the 27.5% they face now.

• Pharmaceuticals and microchips will face a 0% tariff until the U.S. concludes Section 232 trade investigations in a few weeks and imposes new global tariff rates on the two industries. The levy on pharmaceuticals and microchips imported from Europe will not exceed 15%, irrespective of the tariffs applied more widely.

• Tariffs will be applied after the conclusion of 232 investigations into those sectors. The duties on European lumber and copper will not exceed 15%.

• Tariffs on European steel and aluminium will stay at 50%, for now, but the EU and the U.S. agreed that they will be replaced by a quota system that will be negotiated later.

• The U.S. and EU will have zero-for-zero tariffs on all aircraft and their components, “certain” chemicals, “certain” generic drugs, semiconductor-making equipment (shoutout ASML!), “some” agricultural products but with the exclusion of all sensitive products like beef, rice, ethanol, sugar or poultry, natural resources and critical raw materials (can you say Dutch Disease?), and others to be added.

• Tariffs on alcohol like wine, cognac, whiskey etc are yet to be established.

• The EU pledged to make $750 billion in strategic purchases, covering oil, liquefied natural gas (LNG) and nuclear technology during U.S. President Donald Trump's term in office.

• EU purchases of U.S. microchips would be on top of the $750 billion. The U.S. will be the preferred vendor.

• European companies are to invest $600 billion in the U.S. over the course of Trump's second term.

• EU member states will purchase U.S. military equipment. The deal does not specify an amount.

Reactions from European states were mixed. France’s Prime Minister took to X to lament that, “It is a dark day when an alliance of free peoples, brought together to affirm their common values and to defend their common interests, resigns itself to submission." French President Emmanuel Macron had yet to comment when I typed this up.

German Chancellor Friedrich Merz offered a positive spin: "This agreement has succeeded in averting a trade conflict that would have hit the export-orientated German economy hard.” Perhaps the more important signal from Germany is government approval of a 2026 draft budget which includes record investment of 126.7 billion euros and borrowing of 174.3 billion euros as part of its fiscal bazooka for infrastructure and defense. Remember that point, we will return to it in a bit.

EU Trade Commissioner Maros Sefcovic explained that "This is clearly the best deal we could get under very difficult circumstances” and that 30 percent tariffs would have been “much, much worse.”

There are two ways to analyze this development.

1) Europe is fundamentally and existentially weak, it will be a battleground in a multipolar world rather than a pole. The pandemic spurred the EU to joint issuance of debt, but it has not followed through at scale. Russia’s invasion of Ukraine united the bloc rhetorically, but if not for U.S. weapons and support, Ukraine would not be here. (Note — this is becoming less true by the day, see chart below.) The EU remains a bitterly divided, polarized, and immature bureaucratic structure attempting to unite the views of disparate governments that don’t see eye-to-eye on basic things like fiscal policy, defense procurement, and energy security, to name just a few. As recently as last week, a German official told The Wall Street Journal that “all options are on the table…if they want war, they will get war.” Apparently not. If the EU had wanted to push back, it could have done so by making services part of the discussion: While the EU has a goods trade surplus of €157 billion with the U.S., it imported €427 billion of services from the U.S. in 2023 as compared to exports of €319 billion. Not only that, but Europe is a global leader in significant areas that, while not sexy to the AI-tech driven narrative that has driven market performance since ~2010, is just as critical. If Europe won’t throw its weight around with the U.S. when it has this kind of leverage, what hope is there for Europe at all?

2) Europe gets that the way to Trump’s heart is flattery and unrealistic promises that allow him a short term PR “win.” So make a meaningless and deal to minimize short-term damage (remember, the alternative to this deal was 30% tariffs) while building long-term for a rougher and less U.S. centric world. Consider that the “framework deal” says the EU will import $250 billion worth of oil, LNG, and coal annually for the next ~3 years (the remainder of Trump’s term — though we know the president believes he can get a third time). In 2024, the EU imported ~$65 billion, about 26% of the total. The deal says the EU will buy weapons from the U.S., but doesn’t specify how much; the investment pledges are also easy to fudge. Roughly 30% of EU exports (probably those that even the Trump administration realizes the U.S. can’t do without) aren’t covered, and more exceptions are set to be added. It’s easy to dunk on Ursula von der Leyen for looking weak, but in her press conference, she also said that the EU is (for the first time) “building a true foreign economic policy. And for this we have started at home. We are taking bold action to make Europe more competitive, more innovative and more dynamic…We are also creating new trade partnerships around the world – expanding from the 76 we have. We have concluded negotiations in the last months with Mercosur, Mexico and Indonesia.” Go to the European Commission website today and you’ll that von der Leyen attended an EU-China summit on the 25th and launched an EU-Japan “competitive alliance” on the 24th. Thankless is the task of kissing the ass of a U.S. president, but the greater good was served, and Europe won’t forget it. Remember, she’s taking shit for looking weak. That means people want her to be strong, and “her” in this case is not some world historical figure, but rather the manifestation of European bureaucratic power.

You can probably tell that I lean toward option number 2. And I don’t just lean that way — I invest that way. In June, I penned a geopolitical memo exclusively for clients at Bespoke, where I serve as director of research, and the subject line was “Europe is the most undervalued geopolitical power in the world.” (If you want to read this memo, please email my directly, I can’t publish it here in a public form but I can share directly.) One of my best analyses was a bullish take on the German economy I published in September 2022. (Again, reach out if you’d like to read.)

All of which is to say — My money is where my mouth is on this take, and I’ll be judged by market performance.

Even so: I’ll be the first to admit any of this is clear cut or set in stone. I can argue both scenarios. The only thing that is incontrovertible in all of this is that it it seems like a good time to be in the weapons business (and that Dwight D. Eisenhower is likely rolling in his grave). I spend much of my time trying to disprove the positive-EU scenario — that’s how keep my analysis honest. And European governments have kept me extremely busy in this regard. I was close to throwing in the towel on my bullish EU take at the end of 2023 and embracing a more negative point of view. I have been particularly frustrated (analytically) by the complacency with which Europe has acted since Russia invaded Ukraine in myriad ways.

But ultimately I could never quite get there, because for all of Europe’s warts, it is still a place of tremendous wealth, technology, and geographic advantage. Those thinking the EU will collapse have a survival instinct working against them — the EU can either rise to be a peer-level competitor with countries like the U.S. and China…or it will fade into irrelevance and be used as a battleground between other powers hoping to use European fractiousness against itself. Students of history know that you shouldn’t underestimate the European tendency to fight and kill each other, no matter how self-righteous, high-falutin, or self-assured European voices are that its previous barbarism is passe…but also that it is irrational to expect Europe to go into that good night without a fight.

So what does the EU-U.S. framework trade deal mean? It means the EU is weak and feckless and unwilling (unable) to stand up to a bully today…but I think it also means the EU will be determined to correct its flaws and make sure it is not in a similar position in the future. The signal isn’t the deals or the flowery language toward President Trump — it’s the sound of German industry unleashed from the shackles of fiscal austerity, the palpable European disgust with the weakness of their leaders, the new shipments of aid and weapons to the frontlines in Ukraine to keep Russia at bay.

President Trump thinks tariffs can solve everything — he thinks tariffs stopped the India/Pakistan war; he thinks they led to the Cambodia/Thailand ceasefire (trying to get my act together to write a brief on that for the Substack); he thinks they can bring Russia and Ukraine to peace (we have a new ultimatum from Trump to Russia today — from 50 days to “10-12” days, for what I am not quite clear). The bigger macro/geopolitical insight to glean is 1) in a multipolar world, there is no global policemen that everyone respects, so expect more small conflicts around the world, but also 2) they will be relatively contained, because no great power assesses any of these conflicts are critical to their future. That’s why multipolars worlds can feel volatile and yet be more stable…as long as you aren’t the one in the war.

Which is ultimately the best way to think about the U.S.-EU trade deal. Who wins trade wars? The countries that don’t fight them. The U.S. picked a fight with the EU; the EU decided not to fight. Maybe that’s effete, passive, and puny; or maybe it’s losing a battle to stay out of a war and thereby “win” it.