Davin News Server

 
Paul Krugman
I Coulda Made a Better Deal
What, exactly, did Trump get from Europe?

https://paulkrugman.substack.com/p/i-coulda-made-a-better-deal

Trump has now announced a trade “deal” with the European Union that 
looks a lot like the “deal” he made with Japan. I use scare quotes 
because there is little sign of a quid pro quo. The United States is 
imposing a 15 percent tariff that is lower than previously threatened, 
but still vastly higher than we had before Trump. Overall U.S. tariffs 
seem likely to settle roughly at the level that prevailed after the 
infamous Smoot-Hawley tariff of 1930.

In return we got a vague promise of higher European investment in the 
United States. When Japan made a similar promise last week, 
administration officials asserted that this would mean hundreds of 
billions flowing into rebuilding U.S. industry. Japanese officials, 
however, say that the money will consist almost entirely of loans and 
loan guarantees. This strongly suggests that Japan will, if it does 
anything at all, simply be sticking Trump’s name on money flows that 
would have happened anyway. There’s every reason to suspect that the 
same will be true of whatever the EU does.

And like the Japan deal, this deal seems to place lower tariffs on cars 
made in Europe, which have very little U.S. content, than on cars made 
in Canada, which contain many American parts. Add in the punishing 
tariffs on steel and aluminum, and Trump’s trade policy seems, if 
anything, to be tilting the playing field against U.S. manufacturing.

When I point out that Trump’s idea of trade deals seems 
counterproductive even in terms of his claimed goal of boosting 
manufacturing, I get some pushback from readers along these lines: “Oh, 
yeah? If you’re such an expert on trade negotiations, tell me what deal 
you think you could have made.”

OK, I can answer that. If I had been in charge of negotiating with the 
European Union, I would have been able to get a deal with the following 
components:

· Very low tariffs on U.S. exports of manufactured goods to Europe, on 
the order of 1 percent

· Near balance in bilateral trade, with U.S. exports to Europe close to 
90 percent of our imports from Europe

· U.S. companies allowed to operate freely in Europe, earning hundreds 
of billions a year in profits

· European corporations investing more than $150 billion a year — real 
investment, not loans — in the United States

Why do I believe that I could have negotiated a deal like that? Because 
that’s what U.S.-EU international transactions actually looked like in 
2024. So that’s what we could have gotten by doing nothing.

Before Trump returned to power, U.S. nonagricultural exports to the EU 
faced an average tariff rate — that’s the number “MFN AVG of traded TL” 
in this table — of 1 percent. As for U.S. transactions with Europe, they 
looked like this:

Source: Bureau of Economic Analysis

If the trade imbalance looks smaller than the numbers you may have 
heard, that’s because Trump likes to talk about trade balances in goods, 
but ignores the fact that America runs a substantial trade surplus in 
services. If you include both goods and services — and why wouldn’t you? 
— U.S.-Europe trade is fairly close to balance.

But if the US-EU trade relationship was more or less OK last year, why 
did Trump impose huge tariffs and leave many of them in place even after 
the so-called deal? Because he felt like it. You won’t get anywhere in 
understanding the trade war if you insist on believing that Trump’s 
tariffs are a response to any legitimate grievances. And he failed to 
gain any significant concessions, mainly because Europe was already 
behaving well and had nothing to concede.

So was the US-EU trade deal basically a nothingburger? (Substitute some 
European food for burger, if you like.) No, it was a bad thing, but 
mainly for political reasons.

1. Trump probably believes he won, which will just encourage him to 
persist with his trade war.

2. This will hurt the world economy, with the burden falling mainly on 
lower-income Americans. The Yale Budget Lab estimates that Trump’s 
tariffs will leave the U.S. economy 0.4 percent poorer in the long run, 
which is very close to my own back-of-the-envelope calculations. But the 
tariffs are basically a sales tax that will reduce real income for poor 
and working-class families by about 1.5 percent, even as cuts in other 
taxes raise income for the wealthy.

3. European negotiators didn’t make many substantive concessions, but 
they pretended to give ground — and they didn’t retaliate, even though 
they were clearly entitled to do so, because the U.S. has just gone back 
on all its solemn past agreements. This makes the EU look weak, which is 
a bad omen for its ability to deal with real challenges, starting with 
helping Ukraine.

Two less discouraging aspects of what just happened: First, Trump 
appears to have backed down on the idea of treating European value-added 
taxes as an unfair barrier to U.S. exports (which they aren’t, but facts 
don’t matter here.) So that’s one potentially awful confrontation 
avoided, at least for now.

Second, if this trade deal was in part an attempt to drive Epstein from 
the top of the news, my sense of the news flow is that it has been a 
complete flop.