(The views expressed here are those of the author, a portfolio

manager at Fidelity International)

By Taosha Wang

June 12 - U.S. trade negotiations have transitioned from

their opening act, with its many twists and turns, into a new,

protracted chapter: the Slow Grind. It may be less turbulent

than this past spring's drama, but no less worrying for

investors.

Now that the U.S. and China have the framework for a trade

agreement, attention may start to turn to the European Union,

which appears next in line to strike a deal with the Trump

administration. But the prospect of a swift resolution seems

remote.

Finding significant common ground to meaningfully reduce the

EU's substantial goods surplus with the U.S., roughly $200

billion annually, presents a formidable challenge, as major

avenues appear blocked.

First, the EU is highly unlikely to concede on agricultural

market access given the region's strong and comprehensive policy

for protecting local agriculture. Large-scale aircraft deals

also seem improbable given the Airbus-Boeing rivalry. The

contentious issue of pharmaceutical pricing will complicate any

healthcare deals. And American automakers will likely struggle

to make much of a dent in the EU market given entrenched

European consumer preferences and regulatory hurdles.

While Europe could theoretically increase purchases of U.S.

defense equipment or relax "Buy European" policies in defense

procurement, the political palatability of such moves is low.

Consequently, the focus may inevitably shift towards the

services sector, where the EU runs an approximately $100 billion

annual deficit with the U.S., driven largely by the operations

of American technology giants.

Here, a potential landing zone exists: the EU could conceivably

ease some of its more burdensome technology regulations with

limited immediate downside, offering a tangible, albeit partial,

lever to address the overall trade imbalance.

In fact, Section 899 in the Trump administration's proposed "One

Big Beautiful Bill Act" - which threatens to increase taxes on

entities from countries with "unfair foreign taxes" - appears to

be aimed directly at digital taxes levied by EU countries on

U.S. technology companies. This suggests that this area could be

a focal point in U.S.-EU negotiations.

REDUCED PRESSURE

U.S. negotiations with the EU are also occurring against a

markedly different backdrop than the one that prevailed in May

during the earlier round of trade talks with China.

Back then, the United States was just emerging from a

significant bout of financial market volatility and facing the

risk of "empty shelves" if onerous tariffs on China remained in

place, so both investors and business leaders were demanding

urgent action.

The U.S. administration is now operating under fewer acute time

constraints. Importantly, EU exports to the United States are

predominantly industrial and luxury goods, not the daily

consumables that directly impact the average American's

pocketbook.

Adding to this calmer backdrop, capital markets have shown signs

of adapting to the current administration's seemingly

unpredictable trade tactics. The S&P 500 index has

rebounded 20% since its post-Liberation Day low and is only

around 2% below its all-time high.

TACO RISK

One major risk, however, is that the U.S. starts taking a harder

line with Europe for fear of looking weak.

Central to the U.S. negotiation strategy is the perceived

credibility of threats. Given the Trump administration's

emphasis on the president's deal-making prowess, the U.S.

fundamentally cannot afford to be seen as backing down

consistently, a scenario some critics have labelled "Trump

Always Chickens Out" (TACO).

Being perceived as unreliable with ultimatums would critically

undermine the administration's negotiating power, not just with

the EU, but globally. This need to maintain a credible hard line

could add friction to the process, making concessions harder to

make and progress slower to achieve.

Looking forward, this elevated - and likely protracted -

uncertainty in trade negotiations is liable to act as a cap on

near-term equity market upside on both sides of the Atlantic,

particularly heading into the seasonally weaker summer period.

On the currency front, the euro may continue to

appreciate against the dollar - ending a more than decade-long

trend of U.S. dollar strength - if wary European investors bring

more capital back home.

This could give the European Central Bank greater leeway to

implement interest rate cuts, with less immediate concern about

imported inflation. However, such euro strength has historically

been negatively correlated with the performance of risk assets

more broadly, adding another layer of complexity to the

investment landscape.

Further complicating the picture is the risk that the tentative

deal just reached with China could unravel, reflecting the

ongoing tug-of-war within the U.S. administration between China

hawks and pragmatists.

The frenetic pace of the trade war's opening chapter has given

way to a more arduous phase. This "Slow Grind" promises to

generate more uncertainty, testing the patience of markets and

policymakers alike, with progress likely measured in inches

rather than miles.

(The opinions expressed here are those of Taosha Wang, a

portfolio manager and creator of the "Thematically Thinking"

newsletter at Fidelity International.)

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(Writing by Taosha Wang; Editing by Anna Szymanski and

Jacqueline Wong)