BERKELEY/FLORENCE: US President Donald Trump’s “reciprocal tariffs” have overturned the system of global trade. The vague, non-binding “agreements” he has announced are an obfuscation. Each has been unilaterally imposed, leveraging America’s economic and geopolitical power to extract concessions from trading partners. That is why the tariff rates vary both by country (sometimes reflecting political motives) and by sector (steel, autos and auto parts, and semiconductors).

The average US tariff rate now stands at 18.6%, the highest since the Smoot-Hawley tariff that crippled the global economy and contributed to the Great Depression. Gone are the principles of national treatment (treating foreign and domestic producers equally) and most favored nation (treating trading partners equally), the cornerstones of the postwar order that fostered trade, cross-border investment flows, and economic development around the world.

Gone, too, is American credibility. Trump is not to be trusted. He can change the tariff rates at any time, for any reason. His handshake agreements are not legally binding and cannot be monitored and enforced. Moreover, they may not survive court challenges. Trump is asserting that he, rather than Congress, has the authority to set tariffs in response to a “national emergency.” But since there is no emergency, the US Supreme Court should deem the tariffs unconstitutional when it finally rules on the matter. Whether it will, however, is uncertain.

The recent US trade deal with the European Union – “negotiated” in a peremptory meeting between Trump and European Commission President Ursula von der Leyen – underscored one of Trump’s ostensible goals: to achieve America’s re-industrialization through protectionism for domestic producers and commitments by trading partners to invest in the United States. Hence, the tariffs are limited to trade in goods. While the US has consistently run a merchandise-trade deficit with the EU ($183 billion in 2023), its services trade with the bloc has consistently been in surplus ($127 billion in 2023).

The EU is also a major source of investment, production, and employment in the US. Before the handshake deal, EU companies had already invested more than $2.4 trillion in the US economy, and cross-border investments between the US and the EU were valued at nearly $5 trillion in 2023.

Many EU business investments in the US are in the same sectors as EU exports to the US – biotech (pharmaceuticals), automobiles, aerospace, and chemicals. In 2023, European companies employed more than 3.4 million US workers.

But now, most imports of European goods will face a 15% tariff. Certain strategic items are exempted, and the tariff for steel and aluminum will be 50% (a policy at odds with Trump’s re-industrialization goal, since it increases US manufacturing and construction costs). While the Europeans see the 15% rate as a ceiling, Trump sees it as a baseline.

Nor are the tariffs reciprocal: the EU agreed to eliminate its remaining low tariffs on most US industrial goods, while “improving” market access for some US agricultural and fishery products. Meanwhile, the EU will maintain its low tariffs on imports from other trading partners, in keeping with its most-favored-nation commitments. As part of the deal, the EU also agreed to purchase $750 billion worth of US energy by 2028, and to mobilize $600 billion in business investment in the US by 2029.

The investment commitment is not enforceable, since those decisions ultimately fall to European companies. Still, the $600 billion target is reachable, considering that EU companies invested about $605 billion in the US over the last three years. The energy commitment, however, is delusional. US companies would struggle to supply $250 billion in energy exports to the EU each year, given that their global energy exports totaled only $165 billion in 2024. In any case, pursuing the $250 billion target would disrupt energy-market dynamics globally.

Ultimately, the energy deal is sure to fail, as did the 2019-21 US-China energy deal. And over the longer term, Trump’s anti-renewables policies will weaken US producers in those sectors, handing the future to China and other Asia-Pacific countries, which already account for 90% of the global manufacturing capacity in EV batteries and fuel cells, and for almost all solar panels.

So, who “wins” in the US-EU agreement? Many see the EU as the clear loser, since the US clearly managed to use its hegemonic power to extract favorable terms.

But this power rests on the strength of the US economy, which Trump’s policies – unsustainable deficits, cuts to scientific research, attacks on central-bank independence, immigration restrictions, handouts to the fossil-fuel industry – are quickly subverting. Moreover, in the short run, the tariffs will raise prices for US consumers and increase costs for US producers (including foreign investors in the US), slowing the economy. The resulting disruption in global trade will raise prices and slow growth in the EU, too, but by considerably less.

The EU faced a choice. It could pursue a costly trade war or agree to “the best deal we could get under very difficult circumstances” – circumstances that included an implicit US threat to withdraw support from NATO. The EU can counter the negative effects of the tariffs by diversifying its trading partners and negotiating new trade agreements with them. US tariffs are already encouraging closer trading relations with likeminded developed countries like Australia, Canada, Japan, and South Korea.

They may also lend momentum to trade talks between the EU and Latin America’s Mercosur bloc, as well as with ASEAN “connector” economies that are critical to global supply chains. And finally, by sabotaging transatlantic cooperation on China, Trump has given the EU an opening to fashion its own trade and investment agreements with the world’s second-largest economy.

The EU has always been strengthened through crises. The necessary, second-best trade deal with the US should not undermine its main goal: achieving “open strategic autonomy” with an integrated defense industrial base, a differentiated trade profile that reflects its commitment to multilateralism, and policies to promote sustainable competitiveness and innovation, especially in high-tech industries where the EU lags both the US and China. If Europe succeeds, it will emerge as a major pro-democracy and pro-market leader in a multi-polar world.

Laura Tyson, a former chair of the President’s Council of Economic Advisers during the Clinton administration, is a professor at the Haas School of Business at the University of California, Berkeley, and a member of the Board of Advisers at Angeleno Group. George Papaconstantinou, a former finance minister of Greece who negotiated the country’s first bailout, is Professor of International Political Economy at the European University Institute and the co-author (with Jean Pisani-Ferry) of “New World New Rules: Global Cooperation in a World of Geopolitical Rivalries” (Columbia University Press, 2025).

 Copyright: Project Syndicate, 2025.