EU and US Nearing Framework Trade Agreement After High-Level Call

Recent overtures between Brussels and Washington suggest a window of opportunity may be opening to de-escalate simmering trade tensions. A high-level call between European Commission President Ursula von der Leyen and former US President Donald Trump underscores a mutual, if perhaps reluctant, recognition that the vast economic relationship between the two blocs is too significant to be derailed by political brinkmanship.1 With the prospect of broad US tariffs looming, the dialogue has shifted towards finding a workable framework, though the path to a durable agreement is fraught with deeply entrenched structural disagreements.

The Geopolitical Chessboard

The timing of these renewed discussions is not accidental. They occur against a backdrop of increasing global economic fragmentation and a challenging domestic environment for both parties. The US, navigating its own political cycles, has floated the idea of a universal baseline tariff on all imports, a move that would fundamentally alter the post-war trading order.2 For the EU, the imperative is to secure its economic footing, protect its export-driven industries, and avoid being caught in a pincer movement between US protectionism and Chinese industrial policy.

Total trade in goods and services between the EU and US was valued at approximately €1.2 trillion in 2023, making it the largest bilateral trade relationship in the world.3 This immense volume provides a powerful incentive for compromise. However, the talks are not merely about tariff rates; they are about competing regulatory philosophies. Key sticking points include the green subsidies embedded in the US Inflation Reduction Act, which the EU argues disadvantage its manufacturers, and the EU’s own Carbon Border Adjustment Mechanism (CBAM), which US producers view as a protectionist measure. Resolving these requires more than just political goodwill; it demands a complex alignment of regulatory standards.

Dissecting the Sticking Points

While headlines may focus on a single framework, the reality is a multi-faceted negotiation across several contentious fronts. A lasting détente would need to address, at a minimum, the following areas:

• Steel and Aluminium Tariffs: The legacy ‘Section 232’ tariffs imposed on national security grounds remain a significant irritant. While a temporary truce was established via a tariff-rate quota (TRQ) system, it is a fragile arrangement that has failed to satisfy European producers and could easily be undone.
• Green Subsidies and the IRA: The EU has been vocal in its opposition to provisions within the IRA, particularly tax credits for electric vehicles assembled in North America. Brussels seeks exemptions for European manufacturers to ensure a level playing field, a concession Washington has so far been hesitant to grant broadly.
• Digital Services Taxes (DSTs): Several EU member states have implemented or proposed DSTs that disproportionately affect large US technology firms. The US considers these discriminatory and has threatened retaliatory tariffs, creating another potential flashpoint.

Any “framework” agreement would likely be an attempt to park these complex issues, perhaps by extending existing truces or agreeing to further rounds of technical talks, rather than resolving them outright. This creates a scenario of managed uncertainty rather than true resolution.

EU-US Trade Exposure: Key Goods Categories (2023)

The table below illustrates the scale of EU goods exports to the United States in the most exposed categories, highlighting the significant economic value at risk should broad tariffs be implemented.4

Market Posture and Forward Outlook

Market reaction has been, for the most part, sanguine. European equity indices, particularly Germany’s DAX with its high weighting of automotive and industrial exporters, have shown only fleeting sensitivity to tariff rhetoric. This suggests that investors are either pricing in a low probability of a full-scale trade war or believe that any imposed tariffs will be negotiated down to a manageable level. Implied volatility in the EUR/USD currency pair has remained anchored, indicating that options markets are not yet hedging against a disorderly breakdown in talks.5

This calmness may be misplaced. The primary risk is not a sudden collapse in negotiations but a gradual erosion of trust that leads to tit-for-tat measures over an extended period. For portfolio managers, the immediate implication is to scrutinise the US revenue exposure of European industrial, automotive, and luxury goods companies. Companies with inelastic demand or the ability to pass on costs may prove resilient, but those competing in crowded, price-sensitive segments could see significant margin compression.

Looking ahead, a speculative but plausible hypothesis is that any near-term agreement will function as little more than a temporary ceasefire. The fundamental divergence in US and EU approaches to industrial policy, climate regulation, and digital governance is widening, not narrowing. A “deal” may therefore trigger a short-lived relief rally in cyclical and export-oriented stocks, but astute investors should perhaps use such strength as an opportunity to reassess the long-term geopolitical risks now embedded in transatlantic commerce.

References

1. investing.com. (2025, July 7). *EU’s von der Leyen says had a ‘good exchange’ with Trump over trade*. investing.com. Retrieved from https://investing.com/news/economy-news/eus-von-der-leyen-says-had-a-good-exchange-with-trump-over-trade-93CH-4124374

2. The Guardian. (2025, July 7). *Donald Trump threatens 10% tariff on Brics*. The Guardian. Retrieved from https://www.theguardian.com/business/live/2025/jul/07/donald-trump-threatens-10-tariff-brics-trade-war-deadline-deals-letters-business-live-news-updates

3. European Commission. (n.d.). *United States-EU Trade Relations*. Policy. Retrieved from https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/united-states_en

4. Eurostat. (2024). *EU-USA – international trade in goods statistics*. Retrieved from https://ec.europa.eu/eurostat/statistics-explained/index.php?title=EU-USA_-_international_trade_in_goods_statistics

5. Bloomberg. (2025, July 7). *EU Says It’s Closing In on the Framework of a Trade Deal With US*. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2025-07-07/eu-says-it-s-closing-in-on-the-framework-of-a-trade-deal-with-us

@StockMKTNewz. (2025, July 7). [The European Union 🇪🇺 said it’s closing in on a framework trade agreement with the US 🇺🇸 after Ursula von der Leyen held a call with President Donald Trump on Sunday]. Retrieved from https://x.com/StockMKTNewz/status/1909227321057325240