It's been disappointing but not surprising hearing EU politicians since I was alive talking about the need of having a credible defense policy independent of the USA precisely to avoid this sort of scenario, but then doing much less than needed. We made our own bed, and are now lying in it.
However, I wouldn't despair too much about this "trade deal". The energy purchases and investment numbers are wildly unrealistic for political, economical, and logistical reasons, and won't come to pass. We know from previous Trump deals, such as with China during his first term, that countries can just lie about these terms and Trump won't notice or care. The Commission may also be betting on US courts declaring all of Trump's tariffs illegal, given that the president probably has no authority to put them in place.
My main worry is that the blanket 15% tariff may remain after Trump is gone, and renegotiating it down with a future president may prove tricky, as we didn't extract any concessions nor retaliate in any way.
Too many good parts to restack so I did two! It seems that the Union didn't act like a Union, with "a common interest or purpose." The Commission indeed can't act in that interest, if the Member States can't agree on what it is. Instead they often 'compete' more with one another like with the barriers on the single market to protect their sectors' interests. Instead of working together to bake a bigger pie (and each Member State gets a bigger slice), they compete for the biggest part of a smaller pie
Nice post and I agree with most of it. I just have some doubts that the EDF and common procurement would make european defense independent of the US. It is likely that our conventional armies are already superior to the Russian one in a protracted war. However, if Russia wanted to attack us, they'd target our weaknesses: invade and overwhelm one small country, then threaten nuclear retaliation if larger countries intervene.
To counter this strategy without us support, we'd need true common defense and foreign policy as well as our own nuclear deterrent (and not just the French one). I'm not so thrilled at the idea of euronukes, not least because we'd shatter global non proliferation, but without those any other improvement of our defense capabilities is basically a waste of money.
The non proliferation seems to be pretty shattered already. If done at a small enough scale to provide just enough deterrence I think euro nukes would actually be a good thing. It would obviously have to be attached to other federalizing reforms though, particularly on foreign policy
The fact free obsession European politicians have with the Russian “threat” is causing European citizens their prosperity. Give up 🇺🇦 to whom Europe owes nothing. And resume relations with 🇷🇺.
It's disappointing to see the Commission be so happy to be the escape goat of the member states' governments without ever hitting back, at least without the same strength.
The recent comments of Frederich Merz criticizing the deal when he was constantly pressuring to get it done as soon as possible come to mind. In the US there is no world where a President would have stayed quiet hearing such hipocrisy from a Governor.
Does not the example you give for the effect of tariffs rely on an implausibly high vale of the price elasticity of demand?
Allow me to elaborate and pls correct me.
A profit-maximising producer would maximise the product between unitary profit (difference between factory price and marginal cost) and demand, with demand being a function of factory price adjusted for the tariff.
Assuming for simplicity that marginal cost is constant, it can be shown that the elasticity of demand e at the point of price maximisation is:
e = Factory Price) / [(Factory Price) - (Marginal cost of production)]
The (new) factory price is said to be $ 55000. The marginal cost of production is not given, but, assuming a profit margin for high-end car models of 15% at the initial price, it would be $ 51000 (60000 - 60000x0.15).
The price elasticity of demand would then be:
e = 55000 / (55000 - 51000) = 13.75
This would be an abnormally high value for the elasticity.
Another way of expressing the same finding is that the tariff would compel the producer to more than halve its profit margins (from 15% to 7.3%).
Haha, thanks! I like my readers to be on their toes!
I think you are mixing firm level analysis (required for margins/lerner) and market level one (required for tax incidence). A 60/40 split in the tax incidence as I used in my ilustration is not unusual.
(1) The individual demand elasticity facing a particular German car maker is likely to be large- the market for cars is very competitive. Note you must not put in the Lerner formula determining your margin the market |ε d|, but the one for the invidual firm in a market with many close substitutes; it explains why BMW can charge a 10 % markup, not how a tariff is shared across all sellers and buyers.
(2) The example is about tariff incidence, which depends on the much lower elasticity of aggregate U.S. demand for imported cars and the elasticity of foreign supply. With typical values—import‑demand elasticity near 1.5 and export‑supply elasticity around 1—the burden of a 15 % duty plausibly falls about 60 % on European makers, 40 % on American consumers, producing the illustrative €5 000 factory‑gate price cut. My point again: in theory a large country could profit from tariffs; in practice , with my three caveats I add, it is unlikely that the US will.
It's been disappointing but not surprising hearing EU politicians since I was alive talking about the need of having a credible defense policy independent of the USA precisely to avoid this sort of scenario, but then doing much less than needed. We made our own bed, and are now lying in it.
However, I wouldn't despair too much about this "trade deal". The energy purchases and investment numbers are wildly unrealistic for political, economical, and logistical reasons, and won't come to pass. We know from previous Trump deals, such as with China during his first term, that countries can just lie about these terms and Trump won't notice or care. The Commission may also be betting on US courts declaring all of Trump's tariffs illegal, given that the president probably has no authority to put them in place.
My main worry is that the blanket 15% tariff may remain after Trump is gone, and renegotiating it down with a future president may prove tricky, as we didn't extract any concessions nor retaliate in any way.
Too many good parts to restack so I did two! It seems that the Union didn't act like a Union, with "a common interest or purpose." The Commission indeed can't act in that interest, if the Member States can't agree on what it is. Instead they often 'compete' more with one another like with the barriers on the single market to protect their sectors' interests. Instead of working together to bake a bigger pie (and each Member State gets a bigger slice), they compete for the biggest part of a smaller pie
Nice post and I agree with most of it. I just have some doubts that the EDF and common procurement would make european defense independent of the US. It is likely that our conventional armies are already superior to the Russian one in a protracted war. However, if Russia wanted to attack us, they'd target our weaknesses: invade and overwhelm one small country, then threaten nuclear retaliation if larger countries intervene.
To counter this strategy without us support, we'd need true common defense and foreign policy as well as our own nuclear deterrent (and not just the French one). I'm not so thrilled at the idea of euronukes, not least because we'd shatter global non proliferation, but without those any other improvement of our defense capabilities is basically a waste of money.
The non proliferation seems to be pretty shattered already. If done at a small enough scale to provide just enough deterrence I think euro nukes would actually be a good thing. It would obviously have to be attached to other federalizing reforms though, particularly on foreign policy
I like your ideas. Where are the political forces to promote and advance them?
Fragmentation is our biggest enemy and its completely up to us to get rid of it.
The fact free obsession European politicians have with the Russian “threat” is causing European citizens their prosperity. Give up 🇺🇦 to whom Europe owes nothing. And resume relations with 🇷🇺.
It's disappointing to see the Commission be so happy to be the escape goat of the member states' governments without ever hitting back, at least without the same strength.
The recent comments of Frederich Merz criticizing the deal when he was constantly pressuring to get it done as soon as possible come to mind. In the US there is no world where a President would have stayed quiet hearing such hipocrisy from a Governor.
Does not the example you give for the effect of tariffs rely on an implausibly high vale of the price elasticity of demand?
Allow me to elaborate and pls correct me.
A profit-maximising producer would maximise the product between unitary profit (difference between factory price and marginal cost) and demand, with demand being a function of factory price adjusted for the tariff.
Assuming for simplicity that marginal cost is constant, it can be shown that the elasticity of demand e at the point of price maximisation is:
e = Factory Price) / [(Factory Price) - (Marginal cost of production)]
The (new) factory price is said to be $ 55000. The marginal cost of production is not given, but, assuming a profit margin for high-end car models of 15% at the initial price, it would be $ 51000 (60000 - 60000x0.15).
The price elasticity of demand would then be:
e = 55000 / (55000 - 51000) = 13.75
This would be an abnormally high value for the elasticity.
Another way of expressing the same finding is that the tariff would compel the producer to more than halve its profit margins (from 15% to 7.3%).
Haha, thanks! I like my readers to be on their toes!
I think you are mixing firm level analysis (required for margins/lerner) and market level one (required for tax incidence). A 60/40 split in the tax incidence as I used in my ilustration is not unusual.
(1) The individual demand elasticity facing a particular German car maker is likely to be large- the market for cars is very competitive. Note you must not put in the Lerner formula determining your margin the market |ε d|, but the one for the invidual firm in a market with many close substitutes; it explains why BMW can charge a 10 % markup, not how a tariff is shared across all sellers and buyers.
(2) The example is about tariff incidence, which depends on the much lower elasticity of aggregate U.S. demand for imported cars and the elasticity of foreign supply. With typical values—import‑demand elasticity near 1.5 and export‑supply elasticity around 1—the burden of a 15 % duty plausibly falls about 60 % on European makers, 40 % on American consumers, producing the illustrative €5 000 factory‑gate price cut. My point again: in theory a large country could profit from tariffs; in practice , with my three caveats I add, it is unlikely that the US will.