Investing.com -- The clock is ticking for the EU to strike a deal with Washington and avoid a tariff shock, but Capital Economics warns the odds are stacked against a breakthrough as the bloc’s hefty trade deficit and internal divisions cloud the talks.
The stakes are high: if talks fail to produce a deal before the July 9 deadline, nearly all EU exports to the U.S.-about 70% of total shipments-will be hit with a 20% levy, up from the current 10%.
“We suspect a US-EU deal is not imminent. The US is probably less motivated to reach an agreement with the EU than it was with the UK or China,” Capital Economics said, underscoring the lack of urgency in Washington to resolve the standoff.
While the U.S. appears to be in a deal-making mood after recent agreements with the U.K. and China, the EU faces greater obstacles.
The EU’s substantial trade surplus in goods with the U.S. and the difficulty of achieving consensus among the 27 member states are obstacles on the road to a deal.
Still, the recent deals the U.S. struck with the U.K. and China give the EU a clearer sense of how Washington is approaching trade agreements.
"The two new agreements will bolster EU negotiators’ confidence that they can largely adhere to the established policy, which is to avoid escalation, issue some threats of retaliation but with a delay, and remain open to negotiations," the analysts said.
President Trump, meanwhile, has justified the tariff escalation by pointing to Europe’s significant trade surplus with the U.S., which reached $532 billion last year, according to U.S. government data.
Despite these headwinds, Capital Economics believes "it is most likely that the US and EU will eventually reach an agreement that averts a doubling of the baseline tariff in July."