EU, US Near Trade Deal Exempting Airbus, German Cars from Tariffs

As the European Union (EU) prepares to finalize a trade agreement with the United States, its negotiators are focusing on safeguarding key industries to mitigate the impact of high tariffs set to be imposed on EU exports starting August 1. Insiders reveal that the EU Commission, responsible for trade affairs, is close to reaching a preliminary agreement that would exempt certain commercial aircraft from tariffs, potentially boosting Airbus SE. The agreement also includes exemptions for some automobile manufacturers, primarily German companies, providing a reprieve for BMW AG and Mercedes-Benz Group AG.

However, other automobile manufacturers, such as Ferrari NV, may not benefit from these exemptions. The exemptions are likely to be limited to companies with manufacturing facilities in the United States. The industries selected for exemption reflect the political influence of major EU member states, the strategic importance of these sectors to the EU, and the areas where the United States seeks to protect its domestic manufacturers.

Airbus, a leader in the European aerospace industry, is a critical focus of these negotiations. The imposition of tariffs could significantly impact demand and, consequently, Airbus's financial performance. Airbus's complex supply chain and global production network, with major facilities in France, Germany, China, the United States, and Canada, provide it with a competitive advantage. This global presence allows Airbus to sell locally manufactured aircraft to major markets like the United States and China, a strategy that Boeing, which produces solely in the United States, cannot match.

The EU has made protecting Airbus a priority. The EU's industrial affairs representative emphasized that Airbus should not face unfair competition from Boeing, which is based in Arlington, Virginia. The representative argued that without rebalancing, leading industries would lose protection, making such actions economically beneficial. The negotiations are ongoing, and the specifics of the tariff exemptions for aircraft, aircraft components, and other products remain uncertain.

During the Paris Air Show, the U.S. Transportation Secretary expressed support for reverting to the 1979 trade agreement, which exempted aircraft and aircraft components from cross-border trade tariffs. This agreement has historically benefited the U.S. aviation industry, contributing to a trade surplus. The U.S. is currently imposing tariffs on EU exports worth 3800 billion euros, approximately 70% of the EU's total exports to the U.S. The EU Commission has significantly lowered its economic growth forecast for the year due to the impact of the trade war, predicting a growth rate of 1.1% compared to the previous estimate of 1.5%.

The EU must finalize a preliminary trade agreement by August 1 to lock in a 10% tariff rate across the board. If no agreement is reached, tariffs on nearly all EU exports to the U.S. will increase to 50%. The EU is also pushing for the U.S. to set quotas and provide exemptions to reduce the 25% tariff on automobiles and automotive components, as well as the 50% tariff on steel and aluminum. However, progress on these tariffs is not imminent.

The increased tariffs on automobiles have raised costs and operational complexities for European manufacturers, who rely on the profitable U.S. market for high-margin, large SUVs. German manufacturers, in particular, face a challenging situation as they struggle to maintain market share in the U.S. while falling behind in the Chinese market, which is increasingly dominated by domestic brands like BYD Co. BMW, Mercedes, and Volkswagen AG are expected to benefit from a proposed "offset mechanism" that would allow European companies manufacturing in the U.S. to export a certain number of vehicles tariff-free. Porsche AG and Ferrari NV, which do not have U.S. factories, would not benefit from this mechanism.

Volkswagen AG's Audi is considering U.S. production and plans to announce a location this year. Its Q5 SUV, which is imported from Mexico, saw a 29% drop in sales in the second quarter. Mercedes-Benz plans to shift production of its popular GLC SUV to its Alabama plant by 2027. The German Chancellor has supported the idea of using offset rules to reduce tariffs for some European automakers, but negotiations have become increasingly urgent. The German Finance Minister emphasized the need for a fair agreement, warning that the EU would take retaliatory measures if a fair deal cannot be reached with the U.S.