August 2025
After a long wait, we are finally receiving news that the European Union has reached an agreement with the United States on a new trade deal. This was announced by Ursula von der Leyen during President Trump’s golf visit to Scotland. Few details of the deal have been published so far, so we can only comment on what is currently known: a 15% tariff has been agreed for exports to the United States, alongside a commitment by Mrs von der Leyen to purchase energy from the US and to invest in the American arms industry. Personally, I presume that the 15% tariff does not apply across the board but only to selected sectors.
As with Trump’s first term in office, this deal is fundamentally poor. Allegedly, Trump is seeking to address the long-standing trade deficit. However, his definition of the trade balance is highly misleading. While a country’s external transactions may be of interest to government policy, the more appropriate focus would be the current account, rather than the narrow view of the trade balance as presented by President Trump. The current account includes not only the trade in goods, which is Trump’s chosen metric, but also the trade in services, where the US enjoys a substantial surplus that almost entirely offsets the goods trade deficit. In other words, US resources have been extensively invested in service providers such as banks, Google and Microsoft, and the American economy has shifted focus from manufacturing to services.
Moreover, bilateral customs policy cannot address a national trade deficit, which is determined by aggregate demand and supply, areas not being addressed by this policy. From this perspective too, imposing tariffs is a misguided strategy. The only conceivable benefit is increased revenue from the newly collected tariffs, although this would be negligible in comparison to the size of the federal budget deficit.
A 15% or even a 30% tariff will not bring Trump’s dream of reshoring American industrial firms any closer to reality. It should be borne in mind that the US economy is currently operating at near full employment, with very limited spare labour capacity. Economic growth is currently the fastest among all OECD countries, driven primarily by the expansion of the service sector, and only by specific subsectors of industry such as aerospace, defence and energy, which are crucial for generating market-level wages. This also limits labour availability for less competitive sectors.
At best, this policy might incentivise foreign firms to invest in the US. However, the attempt to revive American industry beyond strategic goods and commodities is of limited economic importance. Manufacturing accounts for only 10 to 12 percent of US GDP. Services dominate. Trump is essentially trying to revive old industries.
Now that the US is signing trade agreements with various countries, it is becoming clear that Trump’s declared objectives are being adapted or modified along the way. As mentioned, the reduction of proposed tariffs from 30 percent to 15 percent has come at the cost of European investment in the US defence sector and increased imports of American diesel.
It has long been evident that there is a degree of imbalance in the current account between the US and the rest of the world. Globally, the US has been a deficit economy for some time, while China and the EU have maintained current account surpluses. Under certain conditions, such imbalances can lead to global financial instability. President Trump has alluded to this issue in his speeches as justification for his customs policy. However, his proposals are often incomplete, self-contradictory and therefore largely impractical.
The global current account disparity has two root causes. Firstly, the high levels of spending by American businesses, households and most significantly, the government. The current federal deficit stands at around seven percent of GDP, and total US debt now exceeds 100 percent of GDP. The Trump administration has done little to address this overspending. Indeed, its budget policy focuses more on tax cuts than fiscal control. Secondly, the American market is arguably the most open in the world, including remarkably low protection of goods markets. The current average tariff rate in the US is just two percent, which is impressively low compared to China’s approximately 14 percent and India’s 35 percent. The EU’s average tariff rate is similar to the US at around 2.5 percent, although there are exceptions such as for certain types of cars, which Trump uses as an argument. European agriculture is also more heavily protected than that of the US. The US has long complained that it opened its markets much more quickly and extensively than the rest of the world, and rightly so.
At present, the World Trade Organisation is not the ideal forum to negotiate new global tariff structures, which is why Trump has resorted to bilateral trade confrontations.
According to statements from industry representatives, especially in the automotive sector, the 15 percent tariffs may not represent a major challenge for affected firms. One reason is that some of these companies, particularly Volkswagen, are already considering new investments in the United States. However, the impact will differ by sector, and we must wait for further details of the agreement to understand its broader implications. In the case of Czech exports, it primarily concerns components and parts destined for German goods exported to the US.
Another element of the agreement appears to be the EU’s commitment to purchase American energy products and invest in the US arms industry. Any agreement that ensures a stable, long-term energy supply at reasonable prices can only be beneficial to the EU. The only unknown is the exact terms of these arrangements. Similarly, European investment in the defence industry makes sense given NATO’s agreed targets to increase military spending across all member states.
The US clearly faces a macroeconomic challenge in controlling its growing public spending and more broadly, business and household expenditures. The excess of domestic expenditure over domestic savings is the true reason for the US current account deficit. Trade policy alone cannot fix this. Bilateral tariff wrangling only increases global uncertainty and chaos, which in turn will inevitably hamper US economic growth. So far, the outcomes of Trump’s negotiations appear to be relatively harmless concessions or in some cases, reasonable compromises. This may explain why the financial markets have responded positively, as reflected in current stock market pricing. A fuller evaluation, however, must await further developments.
Dr Zdeněk Drábek
Charles University, Prague