By Matthew Ryan, Head of Market Strategy Ebury International Payments Company
The US and the European Union have reached a trading framework agreementa few days before the August 1 deadline for their duties by President Trump. But what are the details of agreementis it favorable to the US and how did the markets react?
15%duty factor, with a few exceptions
The agreement itself seems to be largely consistent with the design of the White House. A basic 15% duty will be applied to most European goods, including cars, whose import tax will be reduced by 27.5%. There are some special cases, such as steel and aluminum, which will continue to be subject to 50%duties, and zero charges will be applied to a variety of goods, especially aircraft, accessories, selected chemicals, semiconductors and certain agricultural products and raw materials. There was a confusion over whether the medicinal products would be included, but US officials have confirmed that they would actually be subject to 15%.
In addition to duties, the EU has agreed to buy US energy of $ 750 billion over the next three years, with an additional $ 600 billion available for additional investments in America, including military equipment markets. There will be no accumulation of duties, ie 15% will be the maximum tax rate, and not in addition to existing import taxes. As things are, the EU is not going to implement any duty to US goods, although it is worth noting that the details of the agreement must still be finalized, and any retaliation in the future cannot be completely excluded.
Good deal? Or did the EU capitulate?
We consider the terms of the agreement perhaps the smallest of the two evils for the EU. Clearly, 15% duties are much less high than 30% or even 50% threatened by Trump in recent weeks. However, they are also much tougher than the nearly 1% average duty rate in force before the second Trump term, and five whole percentage points higher than the 10% rate allegedly requested by European negotiators during discussions (except for zero duties). It is also higher than the 10% duties negotiated by Britain, although the United Kingdom has had the luxury of having a surroundings of goods trade with America.
Could European leaders had negotiated harder and smarter to achieve a less economically harmful main duty rate and exceptions for more areas? Probably yes, but there would be a risk that there would be new disposal of retaliation, as well as the possibility that they would not prevent the August 1 deadline. In addition, there could be more restrictions with the US in the short term as well as a prolonged period of uncertainty for businesses and consumers. Instead, EU officials chose concessions that would avoid a devastating trade war and an increase in geopolitical risks and security risks, although they faced many reactions from many Member States.
European coins led losses on Monday
The financial markets initially reacted, followed by a clear disappointment. European stock markets opened higher on Monday morning like the euro, as investors have relieved the agreement and avoiding the worst scenarios. However, profits proved to be very short -lived as both stock markets and high -risk coins were depreciated throughout the day. The four main coins of Central and Eastern Europe (PLN, HUF, CZK and Ron) were all upset by about 1% or more compared to the dollar during London, while the euro, Swedish crown and Swiss franc followed.
Clearly, part of the aforementioned moves is about the general strengthening of the dollar, with investors boosting the currency with the expectation that lower duties mean less negative consequences for the US economy. There is also a sense that this is not a particularly good agreement on the European economy, at least based on what was calculated last week and that the seemingly unbalanced structure of the agreement favors the US and US assets much more than the EU.
What are the financial impact of the agreement?
The great fear for market participants after April 2 was that a start of a prolonged trade war could lead the global economy to a sharp deceleration. We are quite confident that this will not happen, and European businesses will now have the luxury of certainty but also the ability to plan themselves in advance, which in itself will limit economic discomfort. We do not consider the impact of the eurozone duties negligible. However, we consider him manageable at current levels, with estimates for a blow of about 0.3-0.5% in GDP in the next three to five years being calculative, but not capable of feeding concerns about recession.
Of course these are estimates and the real impact of commercial restrictions remains to be seen in the future. Therefore, attention will now be shifted from the course of the negotiations on the impact of duties on economies on both sides of the Atlantic. The August PMI business indicators (21/08) will provide the first indication. There is also the issue of the ECB’s interest rates to be considered. At the July meeting, President Lagarde implied an imminent interest rate cessation, while implying that the Council may have finally completed interest rates. However, this attitude could change very quickly, if it is clear that the financial blow of duties is worse than the initially expected.
Source: Skai
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