195. Why The EU Accepted A Raw Deal With Trump

0:00There's so much that doesn't get decided when these big announcements are made. Absolutely. These are just very, let's say, different types of trade deal than you would have expected under any other administration. They're not negotiated at the granular, detailed levels that you would have previously had trade negotiators doing things, which means you end up with announcements from either side that don't always really line up with each other. And things are just being made on the fly to some extent.

0:36Hello and welcome to The Rest is Money with me, Steph McGovern. And alongside me today, I have got Mike Bird, who is an award-winning financial journalist working for The Economist, both as their Wall Street editor and also as co-host of their podcast, Money Talk. So Mike is joining me today from New York to talk all things Trump and tariffs. He's actually a Leeds lad originally, though, that you might pick up in his accent. So, Mike, we've been talking a lot on this podcast about tariffs. So I want to get your take on it all, really, and just bring people up to speed as well with where we're at.

1:16Yeah, for what it's worth, April the 2nd, Liberation Day, my birthday. So a very memorable one this year. It is. It is. So that was a fun day in the office. Yeah, I think Liberation Day came in and the biggest thing that really shocked markets, everyone knows that Donald Trump likes tariffs. Everyone knows that there were going to be additional tariffs on a range of countries brought in this time. I think what people had gotten used to in the last Trump administration was that whatever you start with ends up being significantly reduced by the end. You have these big blustery announcements and then the reality of it gets thinned down and thinned down and thinned down until there's not that much left of what the original proposal was.

1:58And I think that's what people were expecting this time round. And what they got on Liberation Day was something actually a lot more full throated. it basically they were getting uh yeah the full fat version of a tariff regime and it caused this sort of panic uh at least for the first sort of seven days before the 90-day reprieve we have seen a lot of sort of reductions in in the rate since then a lot of exemptions a lot of these sort of relatively thin but better than nothing deals being made uh but yeah it was it was really the sort of extent the scope the scale of the tariffs that upset people in the first place Yeah, so now looking at, you know, kind of the most recent one, the biggest most recent one being this deal with the EU then.

2:42And, you know, it's kind of, I know it's always the devils in the detail, isn't it? What we kind of know is that it's going to be 15 % tariffs for most products going from the EU into the US. Trump had threatened 30 % and so that it's better than that. But can you give us a bit more of like the detail on what this deal is about? Absolutely. And I think that the question of, you know, whether it's a good deal, it's really question of where you're coming from, right? If you're starting from the perspective that you expected 30 % tariffs as Donald Trump had threatened, then obviously 15 % is good.

3:21If you're starting from the perspective of where the tariff schedule was in January or under previous presidents, then it's a terrible deal. I think the most interesting thing about the deal is we heard lots and lots in the months running up to this about potential retaliation, the way the European Union might behave, as with other countries, what it might do to dissuade the US from putting these tariffs in place or to try and put pain on American producers ahead of time. And what we actually ended up with was effectively no retaliation at all, right? You've ended up with 15 % tariffs on the EU and effectively nothing in exchange for that.

4:01Now, it should be said that this is a good deal for European consumers who would ultimately be the ones paying any tariff on US goods, right? It's a very strange thing in these trade negotiations where from the point of view of consumers, the other government is working on your behalf, right? The US government is advocating with the European consumer trying to get tariff rates applied by the EU reduced and the European government in the other direction. Because it's the people who live in the country where the tariffs hit who will essentially pay the tariff because the cost of their products will go up.

4:34Absolutely. And politicians tend to act in these negotiations for the producers. So in Europe, car companies have been a very important part of that. For example, European car companies that export models to the US don't want their buyers paying a tax on that model because it means fewer people will buy it. It's understandable from their perspective why they want that. But most of this negotiation is done with the producers in mind often rather than the consumers. I'm interested in cars. So let's chat a bit about that for a minute. So the deal that we saw agreed with Ursula von der Leyen and Trump on this is that essentially cars will have this 15 % tariff.

5:14So European cars will be hit with a 15 % tariff when they're sold in the US. Now, if you compare that to, for example, the UK, it looks like they haven't got a great deal there because the UK managed to negotiate a 10 % tariff on cars made in the UK and sold in the US. But it's more complicated than that, isn't it? Because there's a limit on how many cars the UK can actually sell in America at this 10 % tariff. It's something like 100 ,000, which is about what we sell there anyway. And then after that, they're hit with the 25 % tariff. Whereas if you look at the EU, it looks like it's 15 % whatever they sell there.

5:57So it's quite hard to work out, isn't it? Who's going to do well in terms of the automotive sector from these tariff deals? It's one of those things where the devil's in the detail as well. You know, these deals haven't been signed, the EU-US deal in particular, they could still be amended. But I think that the best way to look at it from my perspective is you've got to look at the detail of what cars are actually exported from the UK to the US and the EU to the US. And then you start to see why the sort of specialization means that there probably isn't that much advantage to the UK. On top of the issue that you rightly raise of there being a cat number of units at the 10 % rate.

6:36If you look at the structure of cars exported from the UK to the US, you're talking about Jaguar, Land Rover, Mini, and then you're starting to get into sort of real performance cars, you know, Aston Martins and stuff like that. These aren't competing with a lot of the sort of mass market units being sold from the EU. You know, the difference between a 10 % and a 15 % tax rate is important, but it's not the difference between me buying, you know, a Land Rover and a Mercedes. There's not many people who make the decision on that basis. So it does sort of matter the difference in what's actually being produced and what's actually being sold as well.

7:16Now, for the EU, one of the really important things was getting a similar automotive tariff as the Japanese carmakers got in the US-Japan deal, because Japanese carmakers do export a lot to the US. They got that in the 15%. So I think there was a sort of general sense that this was better than they'd expected, or at least as good as they'd expected. So then what about things like looking at steel and aluminium? Because that's been a biggie, hasn't it? But I mean, is there any clarity on that? I couldn't work it out. So I think this is one of the issues, as I say, it's not been signed off yet that they're very likely to return to, partly because the White House is not totally clear of its sort of global view on steel yet.

7:57You may well get something, and it's something people have talked about a lot. The EU and US have to some extent more in common on steel than they have sort of set against each other. The big problem in steel for both of them is overcapacity coming from Chinese exporters. It remains to be seen. I wouldn't be surprised if we get some sort of separate deal down the line where you see the EU and US to some extent on the same side in this, putting on higher tariffs externally. But at the moment, the US announcement on steel is that steel is not covered by this deal and it's still going to be here.

8:33The 50 % rate it was hit before. It's a little bit more quiet than that on the European side, which I think reflects the fact that they think there might be some wiggle room here. But yeah, I think that's something where there'll still be news to come. Yeah. And then similarly with pharmaceuticals, there seems to be confusion there. And obviously, this is one we've talked about a lot because we've heard the EU Commission President, Ersie von der Leiden, saying it suggested that the 15 % tariff that was agreed would cover pharmaceuticals. But Trump had said it wouldn't. So, again, I mean, is that another one where it's literally just we've just got to wait and see?

9:11There's so much that doesn't get decided when these big announcements are made, isn't it? Absolutely. These are just very, let's say, different types of trade deal than you would have expected under any other administration. They're made in a much more slapdash way. They're not negotiated at the granular detailed levels that you would have previously had trade negotiators doing things, which means you end up with announcements from either side that don't always really line up with each other. And things are just being made on the fly to some extent. You know, the pharmaceutical deals that Trump might want is going to cover countries outside the EU as well.

9:49It'll be relevant in India. It'll be relevant in Singapore. But there are a couple of European countries to which this is enormously important. There's Ireland, obviously, and there's also Denmark, home of Novo Nordisk. For those countries, getting the pharmaceutical deal right is enormously important. And they're presumably not very happy that it's completely missing from this and that the US says that it'll be returned to. This doesn't help with uncertainty. We heard, again, Ursula von der Leyen saying that in this presser that she did with Trump in Scotland, this is a good deal and it will bring stability and predictability for businesses.

10:29but I'm not really convinced it will because there as you know you pointed out there's still so much detail to be worked out there's also an irrationality about Trump that you don't know if this is the end or not with him I mean do you think do you think things are going to calm down are we getting stability because it doesn't it really doesn't feel like I've got a business in the UK and I know that we are really conscious of the fact things don't do not feel stable yet in terms of making decisions about investments. And we're just a small business. If you're a big business, you must be constantly thinking, well, hang on, we don't know what really is going to happen next.

11:08Yeah, completely. And I think it goes back to that question of what are you benchmarking it to? Is this stable relative to where things were last summer? Absolutely not. Not in any way. It's extremely unstable. As you say, the White House now has a habit of changing its mind, making deals on the fly. Do I think that Donald Trump isn't going to have any other trade policy issues with the EU over the next three and a half years? No, I don't. I think this will be resumed. I think there'll be elements of it that there are complaints about. If you look at the deals with China in the first Trump term, things were litigated again and again and again.

11:45Is it certain for businesses relative to where we were on, say, April the 5th? It's better. It's better than it was on April the 5th. Now, that bar is so low that you would struggle to get under it. It depends where you're thinking of. I think a lot of people are relieved that that period of absolutely maximum chaos seems to have passed. But the reality of this is it's all going to be more uncertain for at least the next three and a half years. Again, on the EU deal, the other element to this, we've obviously talked about the tariff side of it, is this agreement that the EU who's going to spend hundreds of billions of dollars on US energy products and weapons.

12:26I mean, what are your thoughts on this? With the defence, there's been a little bit of dispute in the numbers. There's a number, I think, 40 billion figure that appears in the European Commission release that didn't appear on the American side. Now, I think about this from the perspective of when it comes to weaponry, European governments, individual European governments are big purchasers, right? And they can swing these things. So if there's some sort of agreement at the European level that these things will be purchased, then maybe that will happen. Though it's very unclear as to who's actually meant to be doing the purchasing, which of the European governments is doing this.

13:02When it comes to energy and when it comes to even more so the$600 billion promise to invest in the US, this is, for want of a better word, just rubbish. It's just nonsense. The European Commission doesn't purchase energy in large volumes like this, right? It's private purchasers that buy this stuff. And the European Commission isn't going to make them purchase American energy or it currently doesn't have the mechanism to do that. With the investment, it's a promise that there'll be European private investment worth$600 billion into the US. There's going to be some of that anyway, right? European companies invest in the US.

13:41I'm sure some of it will be sort of badged under this$600 billion. But it's not something that the European Union can force private producers to do. So it's just a sort of hope, I think, really, that things get brushed under the rug. And by the time anyone gets to the point of just totting up the numbers and saying how much is invested, that all of this is passed and maybe that there's someone different in the White House. I mean, just from the defence perspective, you know, obviously we've heard lots of government, including the UK government, talking about increasing their defence spending. And, you know, I was recently at a company which is massively going to benefit from this.

14:22It's a company that essentially builds ships for the Royal Navy based in Northern Ireland. and as part of you know the the deal I guess they have to try and get as much business as they can in terms of the supply chain from domestic providers so with a company like that which has got this you know essentially mega contract to build these ships but at the same time this pressure to make sure the supply chain has a certain proportion of them as as being domestic providers and not international ones. And then at the same time, you've got people like Trump saying, we're doing these big deals where you're going to spend a load of money on our defence stuff.

15:07You just wonder how it's all going to work out, like whether it's even going to be possible to meet these different requirements because so much is being asked of businesses in terms of what they've got to provide and the politics around it rather than just the actual commercial decisions they should normally be making. Completely. I completely agree. And you see this push and pull when it comes to defence probably as much or more than you do anywhere else, right? So the US government wants European governments to spend more on defence in general. You know, I think there's a lot of people that actually think that's quite reasonable inside the US and outside the US, that there has been a bit of a free rider problem there.

15:48But the US government also wants a large portion of that defense spending to be on buying US military goods. Right. Now, if you're a European government, this sort of uncertainty with the US makes you think exactly the opposite of that. Right. I don't want any more exposure to US defense capacity. I want indigenous production. Right. I want production at home, at least in Europe and maybe even in my home country, because that's the only side of this I can rely on. And I think it gets into this with the tariffs in general, where there's this weird push and pull where, yes, the tariffs do benefit domestic producers to some degree.

16:27If you're making the same widget, your competitors being taxed a higher rate is obviously good for you. But at the same time, these are big international businesses with supply chains all around the world. And the inputs that they buy from overseas are being hosed by all of this. And sometimes it's stuff that you just can't get, right? If you've got a critical input, you're an advanced manufacturing plant. The idea of just switching up production to come from your home country is often just ludicrous, right? It's something that there is no specialism in, no supply chain, nothing at home. And you're basically just saying with the tariffs, you're just going to have to pay extra.

17:05And that's then reflecting the final cost for everyone else, including the government buying the defence material. So, yeah, it's a tough one. And there's a lot of sort of push and pull there. Mike, sit tight for a couple of minutes because I want to ask you a bit more about where this leaves us as a global economy. But here's a quick break first.

17:29Do you think, because the end game for Trump here is to make Americans better off and, you know, what he's doing with these trade tariffs is to try and bring down these deficits, as he calls them. And if you look, carrying on with the example of the EU, if you look at their trade surplus with America, it's something like 200 billion euros last year. So Trump wants to bring that down. Do you think that is what's going to happen? We're going to start to see these surpluses, or as Trump calls them, these deficits with his country. Are we going to start to see them reduce, do you think? The way I think about it is there's three potential different outcomes from the tariffs.

18:14And the US government would currently like you to think that you can have all of them at once, right? One of them is that you end up with more production being done in the United States. Exactly what you're talking about, Steph. The trade deficit comes sharply down because American production goes up, less being produced from abroad. Great news. You've got your factories in Ohio and California and Texas and wherever else you want them. You know, the re-industrialization happens, but that means you can't get number two, which is revenue from the tariffs. Right. One of the other things the US government says it wants to do is garner the revenue from the tariffs, which you can't do if you're reducing the trade surplus aggressively.

18:56Right. You're not going to get the money if you're deliberately thinning down the trade. So those two are in conflict with one another. And the third one basically is this idea that you're going to use it for diplomatic purposes, constantly keeping both allies and enemies in this state of confusion and uncertainty so that you can extract things from them constantly. That means you're not going to get the tariff revenue or the reindustrialization because no one's going to invest if they think you're going to pull the tariffs in three months when you get some concession from the foreign government.

19:28So basically, whatever happens, they can have maybe one out of three of those, right? It's possible that they'll get none, but they can't get three and they probably can't get two either. And the likelihood is things are going to get tougher, definitely in the short term for Americans, aren't they? no absolutely absolutely i i think it goes without saying that when we talk about the politics of all of this you know who's won and who's lost the losers are inevitably consumers on both sides uh and some people produce given items but everyone consumes um and and it's it's just a sort of the economic literature is very clear it's very clear when you talk to businesses it's very clear when you look at the inflation data wherever you look this hurts consumers there really is very little upside on that front yeah but in terms of what Trump cares about which I get the sense that it's what he looks like you know I've been lucky enough if you want to call it that to interview him um in the past and you know and the kind of way he's playing now is very much the I'm going to be the winner I you know I really care about looking like the person in charge here and and in that sense he's kind of played a bit of a blinder hasn't he because he you know came out liberation to these extortionate tariffs um and then agreed has agreed lower ones making these countries feel better off in a way um but they're still paying way more than they were before and we've had all these super cringy kind of moments where leaders you know don't rate Trump for having to sit next to him and go, yes, this is a good deal.

21:12And they all look like they're being held hostage. But he is winning on the world stage in terms of optics, in terms of looking like a person in control. He is definitely winning that battle. Absolutely, completely. If you look at it from his point of view, and Trump has, it's his most consistent, I would say, political belief. You go back to what he was saying in the mid to late 1980s about trade with Japan. It's exactly the same. The playbook is identical. You know, we're being screwed over as Americans. They're making money on our behalf. Everyone is laughing at us. It's this very zero sum view of trade where there's always a winner and always a loser.

21:54There's no sort of net good to any of this. If you look at it from that perspective, he's winning by miles, right? Because he's managing to put these tariffs in place. He's managing to extract what look like sort of big political concessions. Again, these meetings where, you know, someone is forced to say something that is clearly very embarrassing to him. That's a win. And I think the fact that other countries aren't really retaliating, which is probably a surprise relative to where we were a few months ago. But, you know, these tariffs are basically coming into play with no retaliation on the other side.

22:29That's not just the EU, that's, you know, across Asia, other than China, this is really the pattern we've seen basically everywhere. Do you think the markets are kind of behind Trump now? Because it doesn't feel like they're as mad with him as they were at the start of April. I always think of markets as they're not really behind anyone, right? It's a completely amoral, value-free force in the world. They don't do things because something's good or something's bad. It's literally just a numbers game, right? And I think the conclusion that most major investors have come to steadily over the last few months is that you may well see a period of, and you've already seen a period where stocks outside of the US outperform those in the US.

23:15Those periods have been pretty rare over the last few years, over the last sort of 15 years, really. You have seen a period of that, especially because the dollars weakened as well. But I think the conclusion that a lot of people came to was that if you look at the really big companies powering the US stock market in particular, how sensitive to these trade related issues are they? And the truth with a lot of them is not very. You're talking about big companies in the tech sector. They're very software exposed. They might be exposed to the general economic cycle. They're exposed to AI demand, but they're not massive import or export businesses.

23:53The US economy really hasn't slowed down that much yet. We still haven't seen the full effect of all of that. But the sort of expectations of a recession that you were hearing around April, you hear much less about these days. So I think that's a big part of it too. Do you not think that, I mean, I take your point that, you know, you're talking about the Magnificent Seven and the fact that it's very tech dominant, but there is a hardware element to them. Like Apple was stressed about the China taxes and things. Do you think that that has calmed down then as well? I think it has a little bit. And again, you look at Apple and Apple is one of the more exposed one.

24:29And this is true of any of the people that actually manufacture a consumer product. This isn't sort of free to them. But the vast majority of the value of these products is created in the intellectual property, in the software, in the branding, which is all very, very difficult to hit with any sort of tariff, right? You can raise the material costs and that's important. It's not unimportant. And And that's why they were hit in the first place. But it's not the largest scale thing. So I think things like the lack of retaliation, the fact that the White House showed in mid-April when it gave the 90-day pause and with these deals, that there is some flexibility from where they were on Liberation Day.

25:08Now, what may happen later in the year is that it turns out that the macroeconomic impact of this and the consumer impact is much more serious than people thought it was or think it is now. that could definitely happen in which case you are not going to see this sort of miraculous stock market recovery persisting this is all based on a fairly goldilocks set of conditions right these major tech companies that aren't too affected by trade the u.s consumer economy sort of humming along if not absolutely steaming along as it was before and the idea that you're not going to get retaliation that the white house can sort of back down a little bit in certain areas All of those assumptions together have allowed this very rosy view of where markets should be to emerge.

25:54Yeah, we are starting to see inflation go up in America, though. And, you know, there's that beef between Trump and the Federal Reserve, you know, the central bank there, which, like the Bank of England here, sets the kind of bank base rate. And Trump has been desperate for Jay Powell, the head of the Fed, to try and bring that down. and he rightly said he's not going to let politics dictate what they do on raids. I mean, it might not have any choice once he goes and Trump brings in whoever he wants and tries to make it less independent. But in the short term, at least, it does feel like things are getting tougher for American consumers now.

26:36And is that not going to come back and bite him? Because I think, for example, with, you know, I often talk to Robert about what people care about when they're making decisions on voting. And they care about how they feel and how they feel compared to how they used to feel. And, you know, when it comes to the British voters, a lot of the reasons why we've had party changes, why we had the Brexit vote, was because people were just really sick of the status quo, of the fact that they didn't feel like their lives had got better and they wanted to try something different. You know, you could argue that's why Trump got in in the first place, is because they wanted, you know, American voters wanted to try something different and focus on someone who's talking very much more in their language about jobs and about prosperity and cost of living and things like that.