US, EU & the road to de-escalation

Just when it was relatively quiet, tariff disputes are back — and the road to normalisation in the world’s largest bilateral trading relationship looks complex.

Frustrated by the lack of progress in bilateral trade talks with the European Union (EU), United States (US) President Trump has threatened a “straight 50 per cent tariff” on imports from the EU from June 1. This is nearly six weeks earlier than the July 9 expiration of the reciprocal tariff deadline and much higher than the 20 per cent indicated in the April 2 tariff announcement.

It remains to be seen whether this is a gambit aimed at driving a broader EU approach to trade negotiations or is serious in its intent. However, it marks an intensification of trade tensions in the relationship, at least in the short run.

In 2024, the US ran a merchandise goods trade deficit of $US235.6 billion with the EU, importing $US606 billion and exporting $US368 billion. Imports from the EU accounted for 18.4 per cent of US goods imports last year. By contrast, the US runs a surplus in services with the EU valued at $US75.6 billion in 2024.

ANZ Research think it’s unlikely an agreement on Value Added Tax (VAT), regulatory differences (particularly, agriculture and car safety), as well as the EU’s Digital Services Act and Digital Services Tax will be agreed in coming weeks. The debate over VAT, for example, dates to the 1970s.

The most likely route to de-escalation lies with more EU concessions and tariff rate quotas. ANZ Research thinks the EU will have to accept higher US tariffs, particularly in sectors of strategic importance to the US. We do not expect that the EU’s offer of a zero-tariff agreement on industrial goods and some agricultural produce will be sufficient for the US to agree to a deal.

Intensification

Clearly, an intensification in US and EU trade tension, if it materialises and persists, would be negative for growth.

From the European Central Bank’s (ECB) perspective, this would be deflationary and could prolong the rate-cutting cycle. ANZ Research currently expects the ECB to lower rates by 25 basis points on June 5, with one more 25-point cut in the third quarter leaving the benchmark deposit facility rate at 1.75 per cent.

In the US, ANZ Research expects an increase in the US tariff on EU imports to 50 per cent would add an additional 0.2 per cent to US core personal consumption expenditure (PCE). This is over and above ANZ Research’s earlier estimate tariffs would boost the core PCE by between 0.3 per cent and 0.4 per cent in 2025.

These estimates assume some offsets from lower exporter prices, a squeezed US component of imported goods prices (marketing, distribution), weaker US demand and some carve-outs.

Higher US tariffs on the EU would also reinforce the Fed’s cautious approach. ANZ Research maintains its view that June is too early for the Federal Open Market Committee (FOMC) to cut rates.

The committee will want to see how trade talks unfold, and the impact of tariffs on prices and the labour market, before deciding to alter monetary policy. ANZ Research believes the third quarter, and most probably September, is the earliest the Fed will ease monetary policy.

Brian Martin is Head of G3 Economics at ANZ Research

This is an edited version of the ANZ Research report “Trump threatens 50% tariff on EU imports – some implications”, published May 26, 2025