Goldman Sachs Predicts Partial Trade Deal, New Tariffs Between US and EU

Goldman Sachs has predicted that the most likely scenario for the ongoing trade negotiations between the United States and the European Union is that the two sides will fail to reach a comprehensive agreement. Instead, they will reach a partial compromise, with the U.S. implementing new industry-specific tariffs on key goods, while the EU responds with limited and gradual retaliatory tariffs to mitigate the risk of further escalation. However, this delicate balance is fragile and faces the risk of further deterioration.

With less than two months remaining until the July 9 deadline for the temporary suspension of "reciprocal tariffs," negotiations between the U.S. and the EU remain at a standstill. Goldman Sachs' baseline prediction is that the two sides will not reach an agreement, with the U.S. imposing new industry-specific tariffs on key EU goods, and the EU responding with limited retaliatory measures.

Currently, the EU is facing a 25% import tariff on steel, aluminum, and automobiles from the U.S., as well as a 10% "baseline tariff" on nearly all other goods. The U.S. had previously announced a 20% "reciprocal tariff" on EU goods, but this was postponed for 90 days.

The core disagreement between the two sides lies in their differing views on the current tariff levels. The U.S. sees the current tariffs as a starting point for negotiations and demands that the EU make substantial concessions to avoid additional tariffs. In contrast, the EU views these tariffs as an upper limit that needs to be reduced to avoid retaliatory measures.

The U.S. has three main demands in the negotiations. First, it seeks to address tariff and non-tariff barriers that it believes create unfair trade obstacles for U.S. companies. Second, it expresses concern over the EU's regulatory stance on digital services, particularly as it affects U.S. companies. Since 2022, the EU has increased regulatory burdens on digital companies through the Digital Services Act and the Digital Markets Act, with U.S. companies becoming primary targets due to their market size. Third, the U.S. is focused on pharmaceutical pricing, aiming to reduce the significant price gap between the U.S. and other developed countries. The Trump administration had signed an executive order to implement a "Most Favored Nation" pricing mechanism for drugs, which attempted to prevent drug companies from significantly lowering prices in overseas markets while shifting the cost burden to U.S. consumers.

The EU's response to the U.S. demands is twofold. First, it proposes a broad reduction in tariffs, aiming for zero tariffs on industrial goods. Second, it suggests increasing purchases of U.S. products to reduce the EU's trade surplus with the U.S. However, the EU faces significant challenges in addressing specific concerns related to health and environmental standards, as well as digital service regulations. The EU Trade Commissioner has indicated a willingness to increase purchases of U.S. natural gas, weapons, and agricultural products, with potential additional purchases exceeding 100 billion euros.

Goldman Sachs outlines three possible outcomes for the trade negotiations. The first is a baseline scenario where the U.S. and EU reach a partial agreement, with the U.S. implementing new industry-specific tariffs and the EU responding with limited retaliatory measures. The second is an optimistic scenario, similar to the UK's trade agreement with the EU, where the impact on the EU's GDP would be more moderate. The third is a no-deal scenario, where the EU's GDP would face a more significant loss. In all three scenarios, Goldman Sachs predicts that trade friction will have a deflationary impact, as increased tariffs lead to an oversupply of goods, with some products originally destined for the U.S. market being redirected to Europe.

Overall, Goldman Sachs' analysis suggests that the current trade tensions between the U.S. and the EU pose a downside risk to the EU's economic growth projections for 2025 and 2026, which are +0.9% and +1.1% respectively. The risk of inflation expectations not meeting forecasts for 2026 is more balanced, which could lead to a downward revision of the European Central Bank's terminal interest rate target of 1.75%.