US-EU trade pact — like Japan’s — a Potemkin illusion

TOKYO – Donald Trump’s European shakedown, err “trade deal,” has leaders across the globe reappraising their options as the August 1 drop-dead date for the US tariffs looms.

Because, on paper, the 15% tariff that Europe accepted from the Trump 2.0 White House is lower than the feared 30%, Brussels is claiming victory.

After the pact was announced in Scotland, European Commission President Ursula Von der Leyen called the lower tariff a “huge deal.” Trump called it “a good deal for everybody” which is “going to bring us closer together.”

Both leaders are wrong, of course, as the confusion over the earlier deal with Japan demonstrates. There’s a reason why, after months of theatrics, Team Trump is making deals left and right.

One, American households are realizing that they really do pay the consumption tax that Trump’s tariffs amount to. Two, the US courts might soon rule that the tariff power rests with Congress, not a power-hungry president. Trump is making deals while he still can.

Yet in his haste, Trump’s tariff arrangements are sowing confusion. In the case of Europe, it’s an energy agreement that is more of a Potemkin Village than an enforceable deal. The US can’t deliver what it’s demanding Europe buy, while Europe doesn’t have the capacity to accept what the US wants to ship.

Analyst Laura Page at the Kpler commodities firm speaks for many when she dismisses the US$750 billion of oil and gas Trump demands Europe buy in short order as “beyond wild” and “completely unrealistic.”

Turns out, the EU agrees. Since Sunday’s deal was announced, the EU admitted it lacks the power to compel private companies to deliver on Trump’s ginormous quotas. 

“It is not something that the EU as a public authority can guarantee,” a senior EU official told reporters. “It is something which is based on the intentions of the private companies.”

All this sounds eerily family to officials in Tokyo. Since its July 22 tariff deal, Prime Minister Shigeru Ishiba’s government has been struggling to discern (a) what it agreed to, (b) how to wiggle out of whatever interpretation with which Team Trump came away.

The idea that these negotiations are trade deals in the commonly accepted sense seems absurd to anyone who’s seen a good mafia film or two, many economists agree. What Ishiba just agreed to is giving Trump a 15% taste of Japan’s US business.

In return, Ishiba’s economy gets, in theory, two kinds of protection. One is a continuation of US security arrangements. The other is no new extortion attempts from the Trump 2.0 crew. At least for now.

The first concern is a challenging one for Tokyo, since its pacifist post-war Constitution limits its ability to field a conventional military. The trouble is, Team Trump knows that “Japan is so desperate to sustain the security protection that it is willing to pay a steep price,” says Jeff Kingston, head of Asia studies at Temple University’s Tokyo campus.

Make that Europe, too. A pressure point hovering in the background as the EU essentially bowed to Trump’s demands was worrying about where Vladimir Putin’s Russia might veer next. The EU is pledging to make significant purchases of US oil, liquified natural gas and nuclear fuel to replace Russian fossil fuels.

Generally speaking, Europe is the place where Trump’s leverage-heavy negotiating tactics paid off. As Eurasia Group CEO Ian Bremmer puts it: “The US-EU breakthrough is, by far, the most significant of those negotiations to date. It’s also a big win for the United States and for President Donald Trump.”

Cinzia Alcidi, head of research at the Center for European Policy Studies, adds that “this is a bad deal for the EU but still a positive development, compared to the threat of 30% tariffs and a transatlantic trade war. Alas, compared to a world without tariffs – where the EU was just months ago – it’s indeed a big step backwards.

The deal, Alcidi says, also appears worse than what the UK managed to secure – a 10% tariff. But in Trumpian logic, the UK deal was easy to achieve and sell. The UK runs a goods trade deficit with the US; it’s not a US target.

In contrast, the EU-US deal was always presented as key for Trump. The outcome falls short of the EU’s zero-tariff proposal, strongly reflects US interests and gives the impression that the EU was pressured into concessions — an impression Alcidi agrees was “reinforced by the tone” of Trump and von der Leyen’s joint press conference.

Clearly, the US-EU tariff deal has its detractors. To many leaders, it was a matter of Europe accepting a least-worst US tariff deal. French Prime Minister François Bayrou slammed the tariff deal.

“It’s 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,” Bayrou wrote on social media.

By contrast, German Chancellor Friedrich Merz welcomed the agreement, saying it avoided “needless escalation in transatlantic trade relations” and averted a potentially damaging trade clash. Italian Prime Minister Giorgia Meloni said a “trade escalation between Europe and the US would have had unpredictable and potentially devastating consequences.”

Holger Schmieding at German bank Berenberg said the pact helped clear up the “crippling uncertainty” of recent months, even if it seems like a win for the Trump administration. “It’s great to have a deal,” Schmieding says. “In two major respects, however, the outcome remains much worse than the situation before Trump started his new round of trade wars early this year.”

Schmieding argues that “the extra US tariffs will hurt both the US and the EU. For Europe, the damage is mostly front-loaded. The deal is asymmetric. The US gets away with a substantial increase in its tariffs on imports from the EU and has secured further EU concessions to boot. In his apparent zero-sum mentality, Trump can claim that as a ‘win’ for him.”

In a note to clients, Italian bank UniCredit agrees Team Trump came out on top. “Is this a good deal for the EU?” the bank’s analysts ask. “Probably not. The outcome is heavily asymmetrical, and it leaves US tariffs on imported EU goods at much higher levels than EU tariffs on imports from the US.”

Yet for Europe, getting the Trump 2.0 trade negotiations out of the way is in itself a win, of course, notes Eurasia Group’s Mujtaba Rahman. The deal “should contribute to a broader stabilization of the transatlantic relationship, certainly compared to where things sat earlier in the year.”

As recently as May, Trump threatened to impose 50% tariffs on nearly all EU goods, later reducing that to 30%. “The EU and US have now struck deals on NATO and trade; the only real issue that remains outstanding is the question of Ukraine,” Rahman says.

Even so, the ways that Trump’s deal with Japan are going awry suggest tariff turbulence isn’t necessarily going away for Brussels. As Trump 2.0 figures out how wide the gap is between what it claimed to extract from Europe and the reality, will it demand new negotiations?

That’s Japan’s fear as August 1 approaches. That’s the day Ishiba’s team assumes — and hopes — that the 15% tariff kicks in. The reason: Detroit is livid over the deal, arguing the real winners are Toyota, Honda and Nissan. US auto companies face a 25% tax on imports from plants and suppliers in Canada and Mexico. Japan pays just 15%.

The United Auto Workers (UAW) union called it an “angering” agreement. “If this becomes the blueprint for trade with Europe or South Korea, it will be a major missed opportunity,” the UAW said, “We need trade deals that raise standards, not reward the race to the bottom. This deal does the opposite.”

Matt Blunt, president of the American Automotive Policy Council that represents General Motors, Ford and Jeep-maker Stellantis, says “we need to review all the details of the agreement, but this is a deal that will charge lower tariffs on Japanese autos with no US content. Tough nut to crack, and I’d be very surprised if we see any meaningful market penetration in Japan.”

Tokyo officials are privately worried that Trump, under pressure, might claim that the 15% tariff level doesn’t include autos. There are risks, too, in Trump’s strong-arming Japan into, in his telling, investing $550 billion in the US. Trump suggests the windfall is a “signing bonus” that will be his to control, with the US keeping 90% of the profits.

That’s news to Tokyo, which views that $550 billion fund as more aspirational. In Tokyo’s understanding, it won’t be funded by immediate cash but a mixture of loans, grants and financial guarantees administered through government-owned organizations like Japan Bank for International Cooperation and Nippon Export and Investment Insurance.

Trump staffers, meanwhile, keep saying the quiet part out loud, further damaging trust between Washington and Tokyo. Commerce Secretary Howard Lutnick called it a “national security sovereign fund.”

Trade adviser Peter Navarro called the Japan-financed fund a “blank check” – reminding officials from Tokyo to Brussels that Trump’s “art of the deal” is really the art of the shakedown.

Follow William Pesek on X at @WilliamPesek