Key Takeaways
The United States and the European Union have reached a preliminary trade deal that includes a 15% tariff on most E.U. goods, including automobiles, and purchases of American energy totaling $750 billion over three years.
Reaching such import commitments may be difficult from both a supply and demand perspective.
The difficulty arises based on the level of past purchases by the E.U. of U.S. energy exports, the level of demand within the bloc, infrastructure constraints on both the supply and demand side, contractual commitments that private E.U. companies have with their current energy suppliers, and the E.U.’s goals in reducing greenhouse gas emissions.
The European Commission wants greenhouse gas emissions to decrease 90% by 2040 compared with 1990 levels.
The United States reached a preliminary agreement with the European Union that sets a 15% tariff on most E.U. goods, including automobiles. Europe has also promised to buy $750 billion of American energy over three years. The new agreement is a significant reduction from President Trump’s threat to impose charges of 30% on the E.U. from August 1 and substantially reduces the existing tariff rate on Europe’s auto sector from 27.5% to 15%. Although the lower tariff is beneficial to automotive companies, the German Association of the Automotive Industry pointed out that it will cost German car companies billions every year and place a burden on them in the midst of their transformation. The E.U. also plans to invest some $600 billion in the United States.
The E.U. has agreed to buy $250 billion worth of U.S. oil, natural gas, and nuclear fuels per year for three years. The strategic purchases include anything from spot purchases to long-term contracts for liquefied natural gas (LNG) and nuclear technology. The United States became the world’s biggest LNG supplier in 2023, surpassing Australia and Qatar, as rising global prices fed demand for more exports, due in part to supply disruptions and sanctions linked to Russia’s 2022 invasion of Ukraine.
According to European officials, the plan to increase energy purchases is not legally binding and is based on amounts the bloc believes it can accommodate and on U.S. infrastructure capacities. Some industry analysts, however, do not believe that the number of purchases is realistic because all energy trade would essentially have to be diverted to meet that level of purchases. Since the Russian invasion of Ukraine, the E.U. has diversified its energy imports, importing oil and natural gas from a number of nations. The deal would solidify the U.S. as Europe’s key energy supplier, replacing Russia.
The E.U. imported $440 billion worth of oil, natural gas, and coal from various countries last year. About $76 billion of that came from the United States, approximately 26% of what the E.U. is theoretically supposed to spend on U.S. energy annually under the agreement. The United States was the EU’s largest oil supplier last year, with a 16% share of imports, and provided almost half of the E.U.’s imported LNG. If the E.U. were to buy all of the oil and LNG that the United States exports today, the annual value of the purchases would total $141 billion.
Private companies handle most energy procurement in the E.U. and their decisions are typically guided by market prices and consumer demand. Companies also have existing long-term supply agreements with other countries such as Norway, Qatar, Algeria, and Saudi Arabia. Broken contracts can result in significant financial penalties and potential lawsuits. Most long-term LNG contracts with Russia are not expected to end before 2027, the target date by which the bloc wants to phase out Russian fossil fuel imports.
According to the Wall Street Journal, there are also questions about whether the United States could even deliver the energy to meet the target. American LNG terminals are operating at near-full capacity. While companies are expanding facilities in Louisiana and Texas, the expansion will take several years, particularly after former President Biden had placed a temporary moratorium on new licenses for exports of U.S. LNG last year, halting construction. Europe’s re-gasification and pipeline networks, which receive and process LNG, are full, and expansion would require huge investment. E.U. refineries would also have trouble processing extra volumes of light U.S. oil to produce the diesel that powers European autos.
Because global gas prices are expected to fall in the next several years as increased capacity is brought online, the value of Europe’s imports from the United States would also decrease, making the $750 billion goal even harder to achieve.
Another issue is that large additional imports of U.S. energy likely conflicts with the E.U.’s goal of reducing fossil fuel consumption. The European Commission, the E.U.’s executive body, wants greenhouse gas emissions in the bloc to decrease 90% by 2040 compared with 1990 levels. The commission’s previous goal was for a 55% drop in emissions by 2030. The E.U. believes that non-carbon energy can drive economic growth.
Analysis
After months of negotiations, it’s a good sign that the U.S. and E.U. are finally able to come to terms on a preliminary trade deal that prevents President Trump’s threatened 30% tariff from coming into effect. Even though the ideal tariff rate between the U.S. and E.U. is zero, a reduction in tariffs on automobiles by nearly half will benefit American consumers by allowing them to purchase the cars they enjoy for a reduced rate. Given the vast scale of the U.S.’s trade relationship with the E.U., high tariff rates would have been detrimental to Americans by raising costs and adding uncertainty to business investments between the countries.
The deal also provides the U.S. with an opportunity to take the reins as Europe’s preeminent energy supplier. However, it’s unclear that the U.S. will be able to rise to the challenge during the three years set forth by the deal. Even though the Trump administration and congressional Republicans have taken numerous actions towards making it easier to produce and trade energy products, ill-conceived regulations by the Biden administration, particularly the LNG export ban, put the U.S. in a poor position to take advantage of increased demand from Europe. This situation should serve as a lesson to the administration and Congress about the importance of enshrining pro-abundance energy policies into law. Otherwise, a future administration can overturn the progress being made, perpetuating the uncertainty that prevents long-term deals between the U.S. and Europe from occurring.
For inquiries, please contact [email protected]
