WashingtonThe president is getting what he wants from the global economy.
The president’s demands that trading partners bear higher expenses in the form of high tariffs in exchange for the right to sell their goods to the United States seem to be being complied with. Trump views the accords, which were reached through a combination of threats and persuasion, as the realization of his long-held support for protectionism and a significant risk that it will benefit American consumers both politically and financially.
Suggested Videos
Fears of a devastating transatlantic trade war were allayed on Sunday when the United States and the 27-member European Union announced that they had reached a trade framework deal. The EU agreed to accept 15% U.S. tariffs on the majority of its imports. According to the White House, the EU also pledged to invest $600 billion in new projects through 2028 and purchase $750 billion worth of U.S. energy products.
Trump declared on Monday that he had just signed the largest trade agreement ever.
However, there is no assurance that the happy ending Trump has promised will materialize as a result of his drastic changes to U.S. trade policy. There were very few details in the framework agreement. The majority of trade agreements necessitate months or even years of arduous negotiations that fluctuate based on minute issues.
Negotiations with high stakes go against Trump’s
Financial markets appear to have adjusted to a world where U.S. import taxes and tariffs are at their highest levels in almost 90 years, after first becoming alarmed by the president’s protectionist agenda. His charges on imported goods are bringing in several billions of dollars in new revenue, which could partially offset the significant tax cuts he signed into law on July 4.
High tariffs, according to outside analysts, are still expected to increase consumer prices, limit the Federal Reserve’s capacity to cut interest rates, and eventually reduce the efficiency of the American economy. Democrats claim that in the end, the poor and middle class will bear the cost of the tariffs.
Daniel Hornung, a former Biden White House economic official who currently holds fellowships at the Massachusetts Institute of Technology and the Housing Finance Policy Center, said, “It’s pretty striking that it’s seen as a sigh of relief moment.” However, if the new baseline is set at 15% for all trading partners, that is a significant growth drag that raises the probability of a recession and makes it more difficult for the Fed to make cuts.
Just four days prior to the EU deal, Japan had likewise committed to investing in the US and paying 15% U.S. tariffs. Prior to Trump’s return to the White House, the United States had signed agreements that significantly increased import duties from Vietnam, Indonesia, the Philippines, and the United Kingdom.
As nations attempt to meet a deadline on Friday, after which Trump will slap even greater tariffs on those that do not make concessions, more one-sided trade agreements are likely to be reached.
Trump’s long-held belief is suddenly confronted with reality.
The president of the United States has long maintained that America made a mistake by failing to use its influence as the largest economy in the world to create a wall of tariffs, which effectively forced other nations to compete for access to America’s enormous consumer market.
Trump’s use of tariffs has confirmed to his closest advisors that they believe he is a skilled negotiator and that the experts who predicted inflation and downturns were mistaken. Despite a minor decline in Monday afternoon trade, stocks have more than recovered from the April selloff brought on by tariffs.
Now, where are the experts? Howard Lutnick, the secretary of commerce, posted on X.
However, the tale is far from ended. For starters, a lot of information about Trump’s trade agreements is still unclear and hasn’t been documented. For example, Japan and the United States in the United States.
With other nations offering the United States advantageous trade conditions in exchange for U.S. tariffs, the trade agreements do appear to be a qualified victory for Trump, according to Cornell University economist Eswar Prasad. “However, some of the terms of the agreements, like foreign investments in the United States, appear more promising in theory than they may turn out to be in practice over time.”
States and corporations are also suing Trump, claiming that the president overreached himself by claiming national emergencies to support the tariffs on the majority of the world’s economies. A federal court invalidated those tariffs in May. Additionally, oral arguments in the lawsuit will be heard Thursday by an appeals court that decided to allow the government to continue collecting the tariffs for the time being.
Additionally, he has not yet reached a deal with China, which has skillfully avoided giving in to Trump’s demands by threatening retaliatory tariffs and halting exports of rare earth minerals that are vital for wind turbines, computer chips, and electric cars. This week, the United States and China are meeting in Stockholm, Sweden.
Economists are still dubious about how it will affect US consumers.
Additionally, there is doubt that tariffs will result in the economic expansion that Trump has promised.
The most likely scenario, according to Morgan Stanley analysts, is firm inflation and moderate growth rather than a recession. The 15% tariffs on the EU and Japan are, after all, a modest rise from the 10% rate that Trump started imposing during a period of negotiations in April.
Autos manufactured in the EU and Japan will still be subject to a 15% levy that has not yet been reflected in prices at U.S. dealerships, even if the 25% tariffs that Trump had imposed will no longer apply. According to the administration, the lack of rises in auto prices indicates that foreign manufacturers are bearing the costs, but in the end, this could simply be the result of auto inventories being built up to avoid paying import duties.
Before the tariff was put into effect, dealers increased their stock, which lessened the immediate effect on retail pricing. In a different letter, Morgan Stanley stated that the cushion was beginning to deteriorate. According to our Japan auto analyst, replacement cars will probably cost more as pre-tariff inventory clears.
As American businesses rush to adapt to Trump’s new environment, economist Mary Lovely of the Peterson Institute for International Economics warns of a slow-burn efficiency loss. For many years, American businesses have mostly paid the same tariffs—or frequently none at all—on imported raw materials and machinery from throughout the globe.
Tariffs now differ by nation as a result of Trump’s trade agreements. According to her, these fluctuating tariff rates force U.S. companies to modify their designs and source materials from other locations. The administrative load is enormous. All of these factors are dragging the economy down in the long run, but their effects won’t be felt right away.
According to Moody’s Analytics chief economist Mark Zandi, the effective tariff rate in the United States increased from about 2.5% at the beginning of the year to 17.5%.
Zandi declared, “I wouldn’t take a victory lap.” In the upcoming months, the economic harm brought on by the higher tariffs will increase.”
