A silver lining for the EU

In Davos, on Tuesday, the President of the European Commission, Ursula von der Leyen, announced that the EU would shortly be relaunching its strategic partnership with India, and the executive has confirmed that the entire College of Commissioners will visit the country in the spring.

In the space of just a few days, the European Commission has announced an update of its trade agreement with Mexico, the relaunch of the negotiations with Malaysia and forthcoming trade talks with India.

All this on top of an agreement reached before Christmas with the Mercosur countries – Brazil, Argentina, Uruguay, and Paraguay – and another one with Switzerland.

With Donald Trump threatening European imports with 20% tariffs, the EU is urgently diversifying its export markets

The Mercosur agreement is the biggest trade deal ever signed by the EU. It will create a market of nearly 800 million citizens and will slash tariffs, saving EU companies €4 billion annually. The Switzerland comprehensive bilateral trade agreement is worth €550 billion.

The trade agreement with Mexico, a country that Donald Trump is directly threatening with customs duties, eliminate tariffs of up to 100% on key EU exports such as cheese, poultry, pork, pasta, apples, jams and marmalades, as well as chocolate and wine. It also extends the protection of geographical origin labels for European products.

EU-Mexico trade in goods reached €82 billion in 2023, while two-way trade in services reached €22 billion in 2022.

As planned by the Mercosur free trade agreement reached in December, the Mexico agreement also opens public procurements to European companies.

“The EU as a bloc is an export-orientated economy. It therefore benefits from reducing tariff barriers with foreign partners via free trade agreements,” Arthur Leichthammer, from the Delors Institute in Berlin said, adding that “it is often said that free trade agreements benefit German industry, particularly the automotive sector, but due to the deeply integrated European value chains, the economic benefits are much more dispersed.”

But will these deals offset the effects of potential US tariffs? In 2023, the US was the largest partner for EU exports of goods, with the latter benefiting from a trade surplus of $131.3 billion in 2022. High US tariffs risk cutting the EU off from this manna.

“We have to find an arrangement with the US because we can’t in the short term really compensate our trade with the US with other countries,” MEP Bernd Lange (Germany/S&D), chair of the European Parliament’s trade committee, told Euronews’ Radio Schuman Podcast, adding: “At the moment, around about 20% of our exports go to the US.”

Friedrich Merz, the Christian Democrat candidate for German Chancellor, favours negotiating a US trade agreement, but France remains sceptical.

“The Americans want the Europeans to take more responsibility, particularly in the area of defence and security. The Trump administration’s big demand is to stop paying for Europeans’ security,” one senior EU official said, adding that it can be done but “on economic terms that are favourable to Europeans.”

According to this official, the Europeans should tell the US: “We are dealing with the border with Russia, the reconstruction of Ukraine and our security, but we cannot do that with a trade war from the United States.”

A silver lining for the EU – if not for the storm clouds of climate change – may be that Joe Biden’s flagship US Inflation Reduction Act tax incentive programme for green industries could be scrapped by Trump. The new US president has ordered US federal agencies to “immediately pause” the spending of money from the Inflation Reduction Act. The threat of European industries relocating to US soil to take advantage of the IRA might then recede.