By Nick Kostov

PARIS -- Europe's luxury industry is breathing a sigh of relief after escaping months of trade uncertainty that has sapped the appetite of even the wealthiest consumers to splurge on handbags and champagne.

President Trump on Sunday announced a deal with the European Union that will see most goods from the bloc subject to a 15% tariff. The agreement addresses a significant concern among luxury executives: that a prolonged trade dispute would have further dampened demand from consumers already hesitant to spend on high-end goods.

"Overall this is good news," said Bernstein analyst Luca Solca, adding that the deal "eliminates further uncertainty in the broader macro picture."

Failure to reach a trade agreement would have struck at the heart of the luxury industry's business model. Companies such as LVMH, Hermès and Kering have become giants by selling European-made goods to a growing base of affluent customers around the world, relying on relatively frictionless trade. High tariffs would have forced companies to rethink where they produce, a tall order for an industry that has long made a virtue of Old World heritage.

For now, the deal leaves the industry's playbook intact. With high margins and strong pricing power, the luxury industry should be able to absorb or pass on extra costs. Tariffs also only apply to the transfer price of a product between a company's European operations and its U.S. subsidiary -- a figure typically based on production costs and often just a fraction of the eventual sale price.

"15% for European luxury goods is fine," Solca said.

The deal comes at a crucial time for the sector, sales were already softening. Many executives had been counting on the U.S. to drive growth this year, with China -- long the luxury industry's growth engine -- stuck in a protracted economic slump.

In recent weeks, business leaders including LVMH chief Bernard Arnault have spoken out strongly against escalating trade disputes. Arnault lobbied European heads of state to reach a deal with Washington, meeting with officials in France, Germany and Italy. He also spoke to Trump, seeking to de-escalate tensions with Brussels.

"We can't afford to fall out with our main economic partner," Arnault told The Wall Street Journal last week.

Prolonged trade negotiations have weighed on consumer confidence, a key driver of luxury spending. Shoppers need to feel financially stable to justify big-ticket purchases such as $3,000 handbags or $10,000 watches.

In the U.S., the Conference Board's consumer confidence index unexpectedly fell to 93 in June from 98.4 in May, weighed down by tariff uncertainty. In Europe, consumer confidence remains well below its long-term average.

While the agreement avoids a worst-case scenario, a 15% tariff will further test the industry's ability to keep raising prices. Hermès and others are already charging more in the U.S. to offset new duties. These markups come on top of years of successive increases that have already led some shoppers, particularly younger ones, to pull back.

Trump has argued that producing items in the U.S. would eliminate tariffs, but shifting manufacturing across the Atlantic isn't a simple option for European luxury companies. Brands have long-cultivated the image that Old World craftsmanship uniquely positions the continent to create goods for the most discerning customers -- justifying the sky-high prices.

Some groups, including Gucci-owner Kering, have ruled out moving production to the U.S. Others, such as LVMH, say they are looking at ways to adjust their supply chain in part to limit the impact of tariffs.

Arnault told the Journal last week that Louis Vuitton plans to open a second leather-goods workshop in Texas by early 2027. The brand already operates a workshop south of Dallas, opened during Trump's first term, along with two additional sites in California.

At Tiffany, the American jeweler it owns, LVMH has also said it could optimize flows between its factories in Europe and the U.S. to serve each market locally.

Not all parts of luxury groups' businesses are sanguine about the deal.

The French cosmetics industry, for example, warned Monday that the EU-U.S. agreement posed a significant threat to its competitiveness, owing to its lower margins.

It also isn't yet clear what tariff rate would apply to European wine and spirits. These products have often featured in past trans-Atlantic trade disputes.

"We're waiting to hear whether we can pop open a bottle to celebrate," said one executive at a major spirits group.

Write to Nick Kostov at nick.kostov@dowjones.com

(END) Dow Jones Newswires

July 29, 2025 06:49 ET (10:49 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.