What will happen if the US and Europe fail to reach an agreement?

As the deadline for trade negotiations set by the United States approaches, the European Union is preparing to launch a series of tough countermeasures if an agreement cannot be reached with Washington. This move could escalate the transatlantic trade dispute to dangerous new heights and significantly impact the economies of both sides.

According to reports from the Wind Trading Desk, a report from Deutsche Bank published on July 24 indicates that despite recent media reports suggesting that both sides are close to reaching a tariff agreement of about 15%, uncertainty still exists at the negotiating table. According to CCTV News, on July 12 local time, U.S. President Trump threatened that starting August 1, 2025, the U.S. would impose a 30% tariff on products imported from Mexico and the EU.

In the face of pressure, the EU's stance has become increasingly hardline. The report cites media sources stating that the EU has drafted a two-step retaliation plan, with the first step being the immediate imposition of tariffs on U.S. imports worth €93 billion. More notably, the EU may be prepared to utilize its new "Anti-Coercion Instrument" (ACI) to extend the battlefront to the financial and digital services sectors.

This series of potential escalation measures signals a trade conflict that could severely disrupt global supply chains and undermine investor confidence. Deutsche Bank's analysis points out that if the worst-case scenario occurs, with the U.S. implementing a 30% tariff, the EU's GDP could decrease by 0.7%, highlighting the heavy economic cost that could result from a failure in negotiations.

The Economic Calculation of Tariff Escalation

Deutsche Bank's report quantifies the potential economic impact under different tariff scenarios. Currently, the approximately 10% tariff imposed by the U.S. on EU goods has already resulted in about a 0.4% GDP loss for the EU. If both sides reach a 15% tariff agreement, this loss is expected to slightly increase to 0.5%, assuming other conditions remain unchanged.

However, if negotiations break down and the U.S. imposes a 30% punitive tariff, the average effective tax rate will jump to about 21%, and the drag on the EU's GDP will expand to 0.7%. The report emphasizes that "the devil is in the details," and the final economic impact will depend on specific industry tariffs, exemption clauses, and other additional conditions. The report mentions that Japan had to make significant investment commitments and further open its market to the U.S. when reaching a 15% tariff agreement. According to CCTV News, the U.S. and Japan have reached an agreement on tariffs. In exchange, Japan has committed to establishing a fund of up to $550 billion for direct investment in the U.S

EU's Two-Step Retaliation Roadmap

In the face of an imminent deadline, the EU's retaliation strategy is becoming increasingly clear. According to media reports cited by Deutsche Bank, the EU's response plan is divided into two steps.

The first step is to rapidly expand the scope of tariff retaliation. The EU plans to combine the retaliatory tariffs on €21 billion worth of U.S. goods, which were previously postponed due to steel and aluminum tariffs, with a newly discussed list of goods valued at €72 billion. This means that if negotiations fail, the EU will immediately impose tariffs on a total of €93 billion worth of U.S. imports, with rates reportedly as high as 30%. This list is expected to include iconic products such as airplanes and bourbon whiskey.

The second step is more deterrent. Reports indicate that EU member states seem to have reached a consensus on using the "Anti-Coercion Instrument" (ACI). Once the first step of tariff retaliation is initiated, the EU will clearly indicate its intention to prepare for the formal activation of the ACI, with the target likely aimed at the U.S. financial and digital services sectors.

"Anti-Coercion Instrument": The Final Deterrent and Risk

The "Anti-Coercion Instrument" (ACI) is a trade "defensive weapon" that the EU officially established in November 2023 and has yet to be used. Deutsche Bank's report points out that its main purpose is deterrence, forcing third countries that attempt to pressure the EU through trade or investment measures to change their course.

Unlike traditional tools aimed at resolving trade disputes, the ACI has a broader scope of impact. It includes not only restrictions on the trade of goods and services but also authorizes the EU to take unconventional measures such as limiting foreign direct investment and restricting access to banking, insurance, and capital markets.

• Implement restrictions on foreign direct investment entering the EU.

• Impose restrictions on the banking, insurance, and capital market access, as well as other financial services activities.

More critically, the report explains that measures taken under the ACI framework can "not fulfill applicable international obligations," meaning that its actions do not have to be constrained by World Trade Organization (WTO) rules.

The procedure for activating the ACI is also more complex, requiring the European Commission to first determine the existence of "economic coercion," followed by a specific majority vote in the European Council. This makes it a politically charged "last resort" that is not easily invoked.

The Cost of Escalation: A Warning of "Significant Self-Harm"

Although the ACI provides the EU with powerful negotiation leverage, Deutsche Bank's report also issues a stern warning: using this tool could be a double-edged sword. The report states that employing the ACI to counter U.S. financial and digital services would be a "dangerous escalation" that could cause "significant self-harm" to the EU.

The report analyzes that the European economy largely relies on imports of U.S. technology services. Analyst Clemente Delucia wrote in the report that this escalation path "could only have negative impacts for the EU."

Activating the ACI and retaliating against U.S. services imports could be a dangerous escalation of the trade war, especially if specifically targeting U.S. technology services, which could cause significant harm to itself. Europe is highly dependent on these service imports. Any U.S. countermeasures restricting access to technology services could cause widespread disruption to European business activities This upgrade may only bring adverse effects to the European Union.

Nevertheless, the report also acknowledges that in order to gain a favorable position in negotiations, the European Union must demonstrate a willingness and capability to respond strongly, even if it means bearing corresponding costs. Therefore, while reaching an agreement through negotiation is the preferred choice for all parties, a tense path of "escalation to de-escalation" cannot be completely ruled out.

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