Although the outcome of ongoing trade negotiations between the U.S. and European Union remains unclear, there are risks of an escalation in tensions, according to analysts at Barclays.

European trade officials met with their Trump administration counterparts in Washington this week, as a pause to sweeping "reciprocal" U.S. tariffs is due to expire on Wednesday.

But a trade agreement has yet to be reached, with the EU pushing for a deal "in principle" that would include immediate tariff relief for key sectors.

Media reports have suggested that a pact could see the European Commission -- the chief trade negotiator for the EU -- accept a baseline 10% U.S. tariff in exchange for reduced duties on those industries.

Yet some in Brussels are calling on the EU to take a stronger stance and insist on a reduction to the 10% levy rate.

"What is clear is that European countries remain divided in their approach, including on potential retaliation, with Germany and Italy being keen to swiftly finalise a deal with the U.S. administration, whereas France has adopted a more assertive stance," the Barclays analysts led by Silvia Ardagna wrote in a note to clients.

They noted that their "base case" is that the talks will result in an average tariff rate on EU goods exports to the U.S. of around 15%, with the status quo being extended beyond the upcoming July 9 deadline to allow for further discussions.

U.S. duties on pharmaceutical and semiconductor companies will rise to 25% as well, they predicted.

"An upside risk is that the effective tariff rate ends up lower than we have assumed  possibly due to quotas or lower sector-specific tariffs, even if some sectors such as pharma currently face no tariffs," the analysts said.

"The downside risk is that talks fail and the U.S. imposes reciprocal tariffs above 10%, at least temporarily.

Source: Investing.com