Tariffs Loom as U.S. and EU Play Negotiation Game

As the August 1 tariff deadline approaches, analysts such as Jim Reid from Deutsche Bank and Sven Jari Stehn from Goldman Sachs suggest that the escalation in tariffs is more likely a negotiation tactic rather than a firm policy shift. The White House has informed governments worldwide about the impending export hikes, which are set to take effect on August 1 if no agreement is reached with the U.S.

International markets have faced similar deadlines in the past, only to see them pushed back at the last minute. As a result, many on Wall Street have become accustomed to taking the Oval Office’s threats with a grain of salt, with some, like JPMorgan Chase CEO Jamie Dimon, even labeling this approach as complacent.

Analysts and foreign governments alike are preparing for a game of chicken, with Deutsche Bank’s Jim Reid noting that the market generally views these threats as negotiating tactics rather than actual policy changes. Reid pointed out that while Trump initially threatened a 50% tariff on the EU, the current 30% tariff is seen as an improvement.

The European Union’s response has been measured. European Commission president Ursula von der Leyen announced a delay in countermeasures that were due to come into effect this week in response to America’s sanctions on steel and aluminum. Von der Leyen stated that the U.S. had sent a letter outlining measures that would come into effect unless a negotiated solution is reached, and thus the EU will extend the suspension of its countermeasures until early August.

Markets and governments are hoping and expecting diplomacy to prevail, as noted by Reid. However, he also cautioned that at some point, someone’s bluff could be called. With U.S. risk markets around their highs and bond markets relatively stable, Trump may be under less pressure to back down. If significant tariffs are imposed on August 1 in thin holiday markets, there could be a substantial market reaction.

Goldman Sachs analyst Sven Jari Stehn wrote that President Trump’s 30% tariff announcement was a surprise, given the agreements struck in the past. However, he added that this concern may be undermined by the fact that the White House may once again be using threats to speed along trade deals. Stehn maintained the baseline that a “framework agreement” to maintain current tariff rates can be reached, including 10% on all goods and 25% on steel, aluminum, and autos.

Analysts at European-headquartered banks agree with this assessment. UBS’s chief investment officer, Mark Haefele, wrote that if the administration implements the tariffs on August 1 and leaves them at those levels, the likelihood of a U.S. profits and economic recession would increase. Haefele believes that the administration is using this latest round of tariff escalation to maximize its negotiating leverage and that it will ultimately de-escalate, especially if there is a new bout of heightened bond and stock market volatility.