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.
> 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.
Eh. EU was in a reasonably secure position. Russia's turn to war was legitimately surprising because it was objectively a bad move. Yes, bully neighbors was bad form but mostly tolerated (was that the real mistake?) but actually starting a major war and having the gall to not win it is not something easy to predict 10-20 years ago.
US on the other hand had a lot of fingers in a lot of pies, and still had reasons to maintain a large defense budget. Notably against China, not Russia. So this war caught them in a much better position than EU, and they're capitalizing on it.
Reality matters, of course. The fact that EU turned out to be wrong matters. But it's not fair to fault them on this particular issue too much. Or at least I can't, since I believed until the last moment that Russia is just posturing and doing "little green men", _and_ I turned out to be right that invasion would be idiotic. It just happed that Russia made the wrong choice there.
I don't think the EU was in a secure position before 2022; without US assistance, it was (and is) incapable of securing critical areas such as the Sahel or the Red Sea and the Suez Canal, which were at the time fairly violent (and still are). But even assuming that our defense situation was reasonable before 2022, three years have passed since, and the EU has not been up to the task; only Poland and a handful of smaller countries have reacted appropriately, while the big countries, particularly France, Italy and Spain, have done shockingly little and later than needed. Only once the US proved unreliable, at the beginning of 2024, did the EU start to move, but because spending in defense takes years to result in weapons and other military systems we are still vulnerable, and will be until at least 2027 (being very optimistic).
Had European countries reacted swifter and more decisively when Russia invaded, we would have been today on a much better situation, more able to help Ukraine and less reliant on the unreliable Americans.
I am afraid I agree with this observation. We are reaching the limit of our usual muddle through strategy. But both of those potential choices rely on a proper single market- that remains the crucial step we need to take regardless.
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.
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
It is not clear yet. We do not have a European public opinion. Each country has there own politics and that is a major obstacle to Europe-wide reforms.
You say the best readily available alternative is the Mercosur deal. While this may be good, UK trade is a larger share of EU trade than LATAM trade is (I believe) and the UK government is now pro-EU. The UK is also an important security partner.
The recent deal agreed on agriculture could presage a deeper deal on other forms of goods if there was sufficient political will.
Thanks for the post. It’s always a pleasure to read your work. I started following your writing long ago, back when you launched the blog Nada es gratis (a free translation into Spanish of the classical expression “There’s no such thing as a free lunch”).
I have a question. From a free market perspective, I understand that tariffs would primarily harm the U.S., rather than the EU. Suppose the EU maintained zero tariffs on U.S. products, while the U.S. imposed high tariffs (15%, 20%, etc.) on goods from the EU. Even in that case, it seems the U.S. would suffer more. European consumers would benefit from more competition and lower prices, while European companies might face short-term challenges but become more competitive in the long run.
Please let me know if I have misunderstood something.
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.
Taking the market-level perspective, as you suggest, I should say I have a problem with the ‘typical elasticities’ that you quote, specifically, the unitary value of the supply elasticity. As the tariff reduces the demand for foreign cars, an elasticity of supply equal to one should imply a significant reduction in the suppliers’ price, on the understanding that the supply curve coincides with the marginal cost curve. Intuitively, I do not find thud plausible.
Allow me another observation about the very high elasticity of demand supposedly faced by individual firms. This suggests that foreign luxury brands - of which US industry have hardly any equivalent - should coordinate their reaction to tariffs, should not they?
Sorry for bothering you with these fine points of microeconomics. On the main point - namely, that the political economy of tariffs is terrible - I could not agree more.
I visited Bucha weeks after the massacre. I am not prepared, nor I think European citizens are prepared, to see a large scale Bucha in Kyiv, Lviv and all over Ukraine. I will not propose that we abandon the Ukrainians, and I do not think we should propose that. While they are willing to fight, we should be willing to support them.
Fragmentation is our biggest enemy and its completely up to us to get rid of it.
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.
> 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.
Eh. EU was in a reasonably secure position. Russia's turn to war was legitimately surprising because it was objectively a bad move. Yes, bully neighbors was bad form but mostly tolerated (was that the real mistake?) but actually starting a major war and having the gall to not win it is not something easy to predict 10-20 years ago.
US on the other hand had a lot of fingers in a lot of pies, and still had reasons to maintain a large defense budget. Notably against China, not Russia. So this war caught them in a much better position than EU, and they're capitalizing on it.
Reality matters, of course. The fact that EU turned out to be wrong matters. But it's not fair to fault them on this particular issue too much. Or at least I can't, since I believed until the last moment that Russia is just posturing and doing "little green men", _and_ I turned out to be right that invasion would be idiotic. It just happed that Russia made the wrong choice there.
I don't think the EU was in a secure position before 2022; without US assistance, it was (and is) incapable of securing critical areas such as the Sahel or the Red Sea and the Suez Canal, which were at the time fairly violent (and still are). But even assuming that our defense situation was reasonable before 2022, three years have passed since, and the EU has not been up to the task; only Poland and a handful of smaller countries have reacted appropriately, while the big countries, particularly France, Italy and Spain, have done shockingly little and later than needed. Only once the US proved unreliable, at the beginning of 2024, did the EU start to move, but because spending in defense takes years to result in weapons and other military systems we are still vulnerable, and will be until at least 2027 (being very optimistic).
Had European countries reacted swifter and more decisively when Russia invaded, we would have been today on a much better situation, more able to help Ukraine and less reliant on the unreliable Americans.
So what is it — more Europe or less?
Right now we have the liabilities of integration without the benefits.
Dependent on US defence.
Fragmented fiscally.
Reliant on American tech.
That’s the worst of both worlds.
If the goal is to avoid another “Turnberry”, we either:
• Complete the project — real defence, real fiscal firepower, real tech sovereignty.
• Or scale it back — and accept being price-takers in great-power politics.
Muddling through will keep delivering the same results.
I am afraid I agree with this observation. We are reaching the limit of our usual muddle through strategy. But both of those potential choices rely on a proper single market- that remains the crucial step we need to take regardless.
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.
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?
It is not clear yet. We do not have a European public opinion. Each country has there own politics and that is a major obstacle to Europe-wide reforms.
You say the best readily available alternative is the Mercosur deal. While this may be good, UK trade is a larger share of EU trade than LATAM trade is (I believe) and the UK government is now pro-EU. The UK is also an important security partner.
The recent deal agreed on agriculture could presage a deeper deal on other forms of goods if there was sufficient political will.
Thanks for the post. It’s always a pleasure to read your work. I started following your writing long ago, back when you launched the blog Nada es gratis (a free translation into Spanish of the classical expression “There’s no such thing as a free lunch”).
I have a question. From a free market perspective, I understand that tariffs would primarily harm the U.S., rather than the EU. Suppose the EU maintained zero tariffs on U.S. products, while the U.S. imposed high tariffs (15%, 20%, etc.) on goods from the EU. Even in that case, it seems the U.S. would suffer more. European consumers would benefit from more competition and lower prices, while European companies might face short-term challenges but become more competitive in the long run.
Please let me know if I have misunderstood something.
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.
Thank you for the lesson in microeconomics!
Taking the market-level perspective, as you suggest, I should say I have a problem with the ‘typical elasticities’ that you quote, specifically, the unitary value of the supply elasticity. As the tariff reduces the demand for foreign cars, an elasticity of supply equal to one should imply a significant reduction in the suppliers’ price, on the understanding that the supply curve coincides with the marginal cost curve. Intuitively, I do not find thud plausible.
Allow me another observation about the very high elasticity of demand supposedly faced by individual firms. This suggests that foreign luxury brands - of which US industry have hardly any equivalent - should coordinate their reaction to tariffs, should not they?
Sorry for bothering you with these fine points of microeconomics. On the main point - namely, that the political economy of tariffs is terrible - I could not agree more.
I visited Bucha weeks after the massacre. I am not prepared, nor I think European citizens are prepared, to see a large scale Bucha in Kyiv, Lviv and all over Ukraine. I will not propose that we abandon the Ukrainians, and I do not think we should propose that. While they are willing to fight, we should be willing to support them.