Assessing the Long-Term Impact of the Unbalanced US-EU Trade Deal on European Exporters and the Euro's Valuation Potential

The 2025 US-EU trade deal has created a new paradigm for transatlantic commerce, but it's one defined by asymmetry. While the agreement averted a full-scale trade war, it has left European exporters with significant headwinds and raised questions about the euro's long-term valuation potential. This deal, characterized by a 15% tariff on most EU goods entering the US while US exports to Europe remain largely duty-free, has created a lopsided playing field that demands careful analysis from investors.

The automotive sector has been hit hardest by the 15% tariff on EU car exports to the US. German automakers like Volkswagen, BMW, and Mercedes-Benz are already feeling the financial strain. Volkswagen reported a 29% drop in second-quarter 2025 operating profit, with the tariff costing the company €1.3 billion in the first half of the year alone. These companies are now accelerating cross-border production shifts to mitigate the impact. Volkswagen has suspended imports from its Mexican plant to the US and is exploring U.S. manufacturing to secure tariff exemptions. BMW is investing $1 billion to retool its Greer, South Carolina, plant for EV production, with rollouts expected by late 2026. The capital expenditures required to relocate production lines are significant, but these moves reflect a broader industry shift toward nearshoring and vertical integration.

The valuation of European automakers appears to be at a discount. Morningstar analysts estimate that Volkswagen is trading at a 47% discount to its fair value of €172.00. BMW and Mercedes-Benz are similarly undervalued, with fair value estimates of €117.00 and €90.00 respectively. However, these valuations come with caveats. The sector's ability to deliver on profitability hinges on resolving trade uncertainties, particularly the U.S. government's authority to raise tariffs if the EU fails to meet its $600 billion investment commitment. Analysts caution that while European automakers are undervalued, their long-term prospects depend on successful execution of nearshoring and EV strategies.

The euro has already borne the brunt of the trade deal's asymmetry. In the immediate aftermath of the deal's announcement, the euro dropped by 0.7% against the dollar, reaching $1.164275 - its biggest daily loss since mid-May. This decline reflects investor concerns over the perceived imbalance in the deal favoring the US and the broader sentiment of a reduced trade war risk, which strengthened the US dollar. The euro's valuation has been particularly affected, with the currency sliding 1.3% in the previous session.

The long-term valuation of the euro is influenced by several factors. The 15% tariff on EU goods represents a significant increase from the 1.2% average tariff previously in place. This increase could reduce the EU's GDP by approximately 0.5%, according to Jack Allen-Reynolds of Capital Economics. Such a reduction would likely weaken the euro, as economic performance is a key driver of currency strength. The tariff increase also raises the cost of European exports to the US, potentially reducing their competitiveness and affecting the profitability of key export industries.

Conversely, the US stands to benefit from the deal through increased access to European markets for American goods. The EU has agreed to reduce its tariffs on US cars from 10% to 2.5%, which could boost American car sales in Europe. Additionally, the EU has committed to purchasing $750 billion in US energy and military equipment over the next three years and to investing an additional $600 billion in the US economy. These commitments could strengthen US economic growth and, in turn, place upward pressure on the US dollar, indirectly affecting the euro's valuation.

Political factors will also play a role in shaping the euro's long-term valuation. The deal has been criticized as "unequal and unbalanced" by some European officials, with French Strategy Commissioner Clément Beaune arguing that the EU did not fully leverage its economic strength during negotiations. Such criticism could lead to internal divisions within the EU and potentially affect the deal's implementation. If the EU struggles to unify around the agreement or if member states fail to honor their commitments, the deal's long-term credibility could be undermined, which may negatively impact the euro.

The broader economic implications for the eurozone include a decline in growth, increased inflationary pressures, and a weaker euro. Scope Ratings estimates that the EU's largest economies - Germany and Italy - are the most vulnerable, each facing an estimated short-term output loss of 0.4 percentage points from the trade levies in 2025. The higher tariffs may reduce Spain's output by a moderate 0.3 percentage points in the medium run, while France is expected to experience a more modest cumulative reduction in output of 0.2 percentage points in the medium term.

For investors, the key question is whether the undervaluation of European automakers presents an opportunity or a risk. While these companies are trading at significant discounts to their fair value estimates, their long-term prospects depend on successful execution of nearshoring and EV strategies. The valuation of European automakers reflects both opportunity and uncertainty, with firms like Volkswagen, BMW, and Mercedes-Benz trading at significant discounts to their fair value estimates. Investors must balance the sector's undervaluation with the risks of trade policy volatility and high capital expenditures.

In the current environment, patience and a diversified approach will be key to capturing value in this dynamic sector. Firms that successfully execute their nearshoring and EV strategies while navigating labor shortages and geopolitical energy tensions will emerge stronger. For now, Volkswagen, BMW, and Mercedes-Benz remain compelling but cautious long-term plays, with their valuations reflecting both opportunity and uncertainty. As the trade deal's full implications unfold, investors should monitor the execution of these strategies and the broader economic environment for signals of value creation.

The euro's valuation potential remains uncertain, but the deal's asymmetrical impact on trade flows and economic performance suggests that the euro may struggle in the near term. However, if the EU can unify around the agreement and successfully navigate the transition period, the euro could regain strength as the long-term effects of the deal become more apparent. For now, investors should approach the euro with caution and focus on the fundamentals of the companies that drive the eurozone economy.