Goldman Sachs predicts US-EU negotiations: The baseline scenario is "no agreement," with moderate tax increases in the US and EU

Less than two months before the end of the "reciprocal tariffs" suspension period on July 9, negotiations between the US and Europe remain deadlocked. Goldman Sachs' baseline forecast suggests that the two sides will "not reach an agreement," with the US implementing new sector tariffs on key EU goods, while the EU will respond with limited countermeasures.

According to Xinhua News Agency, the EU currently faces a 25% import tariff imposed by the US on steel, aluminum, and automobiles, as well as a 10% "baseline tariff" on nearly all other goods. The US previously announced a 20% so-called "reciprocal tariff" on the EU, followed by a 90-day grace period.

According to reports from CCTV News and other central media, the tariff negotiations between the EU and the US have officially commenced, with both sides exchanging negotiation documents for the first time. However, the EU has clearly stated that it cannot accept the US's so-called universal tariff of 10%. Additionally, the EU has indicated that it will implement retaliatory measures if an agreement cannot be reached.

According to news from the Wind Trading Platform, Goldman Sachs' latest analysis indicates that progress in US-EU trade negotiations is stalled, with fundamental differences in the current tariff positions: the US views the current tariff levels as a starting point and demands substantial concessions from the EU to avoid additional tariffs, while the EU sees these as a ceiling that needs to be lowered to avoid countermeasures.

Goldman Sachs predicts that the most likely baseline scenario is: the US and EU will reach partial compromises, but the US will still implement new sector tariffs on key goods, and the EU may begin limited and gradual tariff retaliation to mitigate the risk of escalating conflict. However, this balanced state is unstable and faces further escalation risks.

Goldman Sachs points out that the aggressive tariff policies already implemented by the US against the EU have increased the effective tariff rate for the EU by 8 percentage points. If the US imposes additional tariffs on key goods as predicted in Goldman Sachs' baseline scenario, the overall tariff rate faced by the EU will rise by 15 percentage points, reaching the highest level in nearly a century. This will have a significant negative impact on economic activity in the Eurozone, with GDP expected to be dragged down by 0.7% by the end of 2026.

Core Differences in US-EU Trade Negotiations

The main obstacle in the negotiations is the starkly different views on the current tariff levels: for the US, the current tariff levels are a starting point, requiring substantial concessions from the EU to avoid additional tariffs; for EU officials, these tariffs are a ceiling that needs to be lowered to avoid retaliation.

As the US-EU negotiations remain deadlocked, both sides are blaming each other: EU Trade Commissioner Valdis Dombrovskis mentioned the lack of specific details in the US government's demands, while US representatives expressed frustration over the "EU's refusal to provide any written proposals."

The US's demands on the EU can be divided into three main areas. The first is tariffs and non-tariff barriers, with the US believing that the EU's tariffs and non-tariff barriers create unfair trade obstacles for American companies.

The second area is digital services regulation. The US has expressed concerns about the EU's regulatory stance, particularly regarding American companies. Since the EU passed the Digital Services Act and the Digital Markets Act in 2022, the regulatory burden on digital companies has increased. Due to their relative size in the market, American companies have become the primary targets of EU monitoring and enforcement activities The third area is drug pricing. To narrow the significant gap in drug prices between the United States and other developed countries, the Trump administration signed an executive order to implement a "Most Favored Nation Drug Pricing" mechanism. This initiative aimed to prevent pharmaceutical companies from significantly lowering prices in overseas markets while shifting cost pressures onto American consumers. According to estimates from the White House, drug prices in the U.S. are, on average, about 175% higher than in other countries. Trump repeatedly criticized the European Union for enjoying an "unfair" advantage in drug pricing during related press conferences, emphasizing that this is a "planned operation" that harms American interests.

The European Union's response to the U.S. mainly focused on two aspects. First, it proposed a broad reduction in tariffs, specifically zero tariffs on industrial goods. Second, it aimed to increase purchases of American products to reduce the trade surplus in goods between the EU and the U.S.

However, specific concerns regarding health and environmental requirements, as well as digital service regulation, are particularly difficult for the EU to address. EU Trade Commissioner Valdis Dombrovskis has indicated that there may be an increase in purchases of American natural gas, weapons, and agricultural products, with potential additional purchases exceeding €100 billion.

Three Possible Negotiation Outcomes

With more than 45 days remaining until the end of the "equivalent" tariff suspension period for specific countries, both sides still have time to bridge the gap. However, Goldman Sachs expects that a final decision on the U.S.-EU trade agreement may not come until late June, likely after the NATO summit, close to the July 9 tariff suspension deadline.

Goldman Sachs analysts believe that the U.S.-EU trade negotiations may yield one of the following three outcomes:

Baseline Scenario: Unstable "Moderate Tariffs"

Goldman Sachs' baseline forecast suggests that both sides will reach a limited compromise, with the EU committing to increase purchases of U.S. goods by about €50 billion annually and some regulatory relaxations, while the U.S. may agree to limited exemptions on existing tariffs. Subsequently, the U.S. will still impose new sector tariffs on key products, and the EU will begin limited and gradual tariff countermeasures. Goldman Sachs views this as an unstable balance with risks of further escalation.

UK-style Agreement: Unlikely in the Short Term

In this scenario, the U.S. would provide meaningful duty-free quotas for current product-specific tariffs and potential key sector tariffs while maintaining a 10% equivalent tariff. The EU would offer better market access for U.S. goods and services, increasing purchases of U.S. goods by about €100 billion annually and possibly abandoning retaliatory plans. Goldman Sachs believes this outcome is unlikely, especially in the short term.

No Agreement Scenario: Significant Escalation of Conflict

In this scenario, the U.S. would impose a full 20% "equivalent" tariff on the EU, and the EU would respond more aggressively, potentially tightening restrictions on U.S. services provided to the EU. The U.S. may further retaliate, leading to a significant escalation of conflict.

Impact on Eurozone Economy and Inflation

In the baseline scenario, Goldman Sachs continues to expect that trade friction will impose a 0.7% overall drag on the Eurozone's real GDP, with most of the impact realized by the end of 2025. In the optimistic UK-style agreement scenario, the drag on Eurozone GDP would be more moderate, around 0.4%. In the no-agreement scenario, Goldman Sachs' model predicts that the loss in real GDP will rise to 1.0% Regarding inflation, Goldman Sachs believes that the impact of trade friction is quite similar across all three scenarios and generally leans towards deflation. This reflects the significant deflationary pressure that will arise from the surplus supply of goods caused by tariffs, as some products originally destined for the U.S. market will be redirected to the European market.

Overall, Goldman Sachs' analysis and the possibility of further deterioration in trade tensions between Europe and the U.S. indicate a downward bias in the eurozone's average annual growth forecasts of +0.9% and +1.1% for 2025 and 2026, respectively. The forecast risk for inflation expectations in 2026 being lower than expected is more balanced, which poses a downside risk to the European Central Bank's terminal rate forecast of 1.75%