Analysis: A US-EU trade deal looks unlikely. What does that mean for the UK?
The clock is ticking on the EU-US trade deal set to expire on 9 July. The European Union is pushing for immediate relief from tariffs, but the bloc expects even a best-case deal to include a degree of asymmetry.
While the UK is not at the negotiating table, Britain may find itself absorbing collateral damage from a transatlantic tariff war.
Washington’s position remains uncompromising. A short negotiation document released last week by the US administration outlines expectations for EU concessions – without offering any in return. The baseline 10 per cent US tariff is likely unavoidable.
Brussels had initially set its hopes on securing a trade deal modelled on the US-UK agreement. But EU officials now acknowledge the US trade demands are so “far-fetched” that it’s not clear any deal can be made. Should agreements fail, a summer of tit-for-tat tariffs could follow – meaning higher-for-longer interest rates on both sides of the Atlantic.
As this reality sinks in, Oxford Economics estimates the US will maintain its 10 per cent baseline tariff, while the EU may retaliate with 20 per cent tariffs on a quarter of US imports, targeting products worth nearly €100bn.
Under the proposals, the most adversely affected European markets will be those with a high ratio of US exports to their GDP, namely Ireland and Germany due to their dependence on US exports of cars and pharmaceuticals.
A more severe downside scenario predicted by Oxford Economics could see Trump escalate to 50 per cent tariffs on all EU imports, as initially announced in May.
This would effectively close the US market for most EU exports and triggering a tough response from Brussels. The EU could retaliate in kind, potentially increasing their ‘reciprocal tariffs’ to 50 per cent and extending the list of products subject to EU tariffs.
Still, any European retaliation will likely be limited by internal economic fragility and the relatively low dependence of the US on the EU for key imports. Unlike China, the EU lacks dominance in critical supply chains. Pharmaceuticals is one of the few sectors where it could disrupt US interests.
What would no trade deal mean for the UK?
The EU remains Britain’s largest trading partner, and a slowdown in the eurozone, spurred by higher tariffs and sluggish growth, could impact demand for British exports.
Many UK supply chains are linked with EU firms exporting to the US. Trade friction across the Atlantic risks disrupting goods flows, leading to higher input costs, more delays, and renewed pressure on domestic prices.
The UK has already struck its own agreement with the US – the ‘Economic Prosperity Deal’ – capping tariffs at 10 per cent. While this may shield British firms from the worst of the tariff fallout, it still leaves UK exporters at a disadvantage compared to pre-Trump administration levels.
The UK has managed to secure itself a “unique position”, said Maxime Darmet, senior economist for the UK, US and France at Allianz Trade, but businesses still face a lot of uncertainty.
“They may understandably be less optimistic, but they’re ready to pivot and find new opportunities where necessary. This balancing act [Economic Prosperity Deal] will be crucial in the coming months, as the UK seeks to maintain, manage and build essential trade relationships with the US, EU and, increasingly, Asia,” said Darmet.
Data from Allianz Trade’s Global Survey suggests that nearly a third of UK firms now plan to seek out new markets – up from a quarter before the US deal.
Asia-Pacific and Western Europe are emerging as preferred regions, while reliance on North American production appears to be falling. Meanwhile, 87 per cent of businesses expect to re-shore at least some operations to the UK.
According to Capital Economics, global GDP will lose momentum over the next two years, as Trump’s protectionist trade agenda weigh on US activity and fiscal policy proves less supportive of growth in China.
Inflation is expected to calm, giving central banks leeway to press on with interest rate cuts. Tariffs will only have a modest impact on US economy with GDP growth slowing to 1.5 per cent annually.
Overall eurozone GDP growth is predicted to remain sluggish while inflation in the UK is expected to fall to 2.4 per cent next year. Analysts expect the Bank of England to cut interest rates in August and November to bring them down to 3.75 per cent.