If it wants lower tariffs, the EU must simplify agreement-making

The United States and the United Kingdom reached a preliminary agreement last week to reduce tariffs. Although it has not yet been formally signed, the agreement provides for the elimination of tariffs of 25 percent on aluminum, steel, and automobiles, as well as a reduction of tariffs on British cars imported by the US from the current 27.5 percent to ten percent.

This will apply to a quota of one hundred thousand imported British vehicles, which corresponds to last year’s number. In return, the US will seek a significantly higher import of British beef and ethanol, although such imports have so far been limited due to concerns about the presence of growth hormones.

The United Kingdom has also agreed to purchase Boeing aircraft worth ten billion dollars. However, the status of pharmaceutical products is still unclear, although they are very important as they constitute the third most significant export category of the UK to the US, with an export value of 6.5 billion dollars.

In 2024, the United Kingdom exported nearly 72 billion dollars worth of goods to the US, representing a 12 percent increase compared to 2022. The largest share of exports consists of machinery and parts for nuclear reactors (21 percent), vehicles (16.4 percent), and pharmaceutical products (nine percent). Unlike the United Kingdom, the EU is currently showing weaker initiative in negotiations, further burdening the already overburdened economies with bureaucracy, as noted in this week’s Focus of the Croatian Employers’ Association (HUP).

If the EU truly wants to conclude more free trade agreements with other countries, it will have to abandon rigid sustainability requirements and accept the ‘naked’ reality that economies become more sustainable as their economic prosperity grows. Otherwise, the EU should compensate those countries for the additional costs associated with meeting those standards. If it continues with its current approach, there will be no new trade agreements, and European companies will remain without a more competitive access to key foreign markets.

A particular challenge is the environmental and labor standards that the EU unilaterally imposes, for example, through the Supply Chain Act planned for 2027. Namely, this law obliges large companies to monitor and prevent human rights violations and environmental damage throughout their supply chain, which in practice creates relatively high administrative and financial pressures, especially for companies operating in less developed markets. Although from a Western perspective these standards make sense, developing countries like India and Indonesia still prioritize short-term material benefits over long-term sustainability goals.

The EU further complicates negotiations

The EU is also lagging in terms of tax policy, refusing to reduce taxes and business costs for foreign companies, thereby further worsening the competitiveness of its own economy, according to HUP.

Instead of following the example of the UK and the US, the EU complicates negotiations further, including the announcement of new tariffs on American products, such as Boeing aircraft, if negotiations do not progress as expected. In the event of a breakdown in negotiations, tariffs of 25 percent on aluminum and steel from the EU, 25 percent on automobiles, and a general tariff of ten percent on all imports from the EU will be reactivated. According to Allianz forecasts, Germany could absorb around 33 billion dollars worth of Chinese goods over the next three years, which would increase its total imports by 2.5 percent. However, this increased competition could extinguish between 17,000 and 25,000 jobs in local manufacturing, particularly in the machinery, textiles, and non-metallic mineral products sectors. A significant turnaround comes from the relationship between the US and China, as the two countries have reached a historic agreement to end the trade war that has severely shaken global markets. A 90-day period without new tariffs has been agreed upon, after which tariffs could fall by up to 115 percentage points.

According to the agreement, US tariffs on Chinese goods would fall from 145 to 30 percent, while Chinese tariffs on American goods would fall from 125 to ten percent. This news has brought optimism to the markets, with oil prices and leading stock indices rising, the price of gold falling, and the US dollar recovering against the euro. Tariffs are essentially a form of tax, and with the recent reduction in US tariffs, the effective rate has fallen from approximately 24 to 14 percent. This effectively provides American consumers with a tax relief of about three hundred billion dollars, further enhancing the stimulative nature of the trade agreement reached with China.

However, the 90-day timeframe seems ambitious, considering that negotiations for the first phase of the trade agreement with China during the first administration of US President Donald Trump lasted nearly a year and a half, and even then not all goals were achieved. Therefore, the EU must urgently intensify its negotiations with the US to avoid further negative consequences for its economy and business sector. The US has also significantly reduced the ‘de minimis’ tariff on small shipments from China, from 120 to 54 percent for postal shipments valued up to eight hundred dollars, and to 30 percent for commercial shipments, representing a further reduction in trade tensions between the two countries. This change provides partial relief to large Chinese e-commerce companies like Shein and Temu, which heavily rely on direct delivery to consumers in the US under the ‘de minimis’ threshold.