*

Deal lowers tariffs but still costly for carmakers

*

German automotive industry faces billions in costs

annually

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Volkswagen, BMW, Mercedes lead share fall

(Writes through with industry reaction, context, details on

deal)

By Christina Amann and Philip Blenkinsop

BRUSSELS, July 28 (Reuters) - Europe's carmakers,

already battling stiff competition from Asia and a costly

transition to electric cars, were dealing with another dose of

reality on Monday - tariffs imposed by U.S. President Donald

Trump.

A deal on Sunday to avert an all-out trade war between the

European Union and the United States brought some relief, but

the agreed lower tariff of 15% (versus 27.5%) is still set to

cost carmakers billions and leaves much uncertain.

"We think that despite the relief of a better

than-worst-case tariff outcome, the (removal of the) upside risk

of a deal is leaving the sector vulnerable for a reality check,"

Barclays said in a note.

Industry welcomed the planning security brought by the deal,

but warned that companies were still lacking detail and called

for further measures to reduce trade barriers that threaten

their export-focused businesses.

Germany's VDA association for the sector said the 15%

baseline tariff would cost the German automotive industry

billions annually.

The United States, the world's biggest importer of German

cars, had slapped a 25% punitive rate on car imports from Europe

in April, prompting companies to slash their outlooks and look

at ways - from investments to production shifts - to appease

President Trump in the trade war.

While the 15% tariff agreed between Trump and European

Commission President Ursula von der Leyen on Sunday is an

improvement, it is six times as much as the 2.5% enjoyed by

exporters before Trump's trade war.

European auto stocks rose briefly on Monday, but the

initial optimism quickly faded, with the sector down 1.2% at

1325 GMT, led by Volkswagen, BMW, Mercedes

and Stellantis ( STLA ).

"We welcome the agreement between the EU and the U.S. in the

tariff dispute and the planning security that comes with it for

the European automotive industry," Volkswagen said in a

statement to Reuters.

CONSTRUCTIVE DIALOGUE

Europe's largest carmaker said last week it was hoping for a

separate deal of its own on top of a renegotiated U.S.-EU trade

framework.

Mercedes-Benz called for "constructive dialogue" between

Brussels and Washington as they work to implement the deal,

parts of which require further negotiation.

Tariffs cost Volkswagen some $1.5 billion in the first half

of 2025, prompting the company to lower its sales and

profitability guidance for the full year.

Its luxury brands Porsche and Audi, which also

cut its guidance on Monday, are particularly exposed to U.S.

tariffs with no local production.

Part of von der Leyen's deal with Trump also included a

promised $600 billion in investment from European companies in

the U.S.

Volkswagen CEO Oliver Blume said last week that his company

is in talks with the U.S. Department of Commerce and offers a

"very attractive investment package". He raised the possibility

of building an Audi factory in the country.

It was not clear whether such possible investments are

included in the sum promised by von der Leyen, raising questions

over the leverage carmakers have in their separate talks with

Washington for sector-specific relief.

For its part, the European Union agreed to cut its import

duty on U.S.-made cars to 2.5%, an EU official said on Monday.

Sources said this could go down further to zero.

BMW and Mercedes stand to benefit from this, given they both

produce SUVs out of large factories in the United States for the

world market.

The two companies have supported a proposed mechanism to

offset imports and exports for more favourable trade conditions.

(Writing by Rachel More; Editing by Sudip Kar-Gupta and David

Holmes)