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Japan Times
4 hours ago
- Japan Times
EU reaches broad tariff deal with U.S. to avert painful trade blow
The U.S. and European Union agreed on a hard-fought deal that will see the bloc face 15% tariffs on most of its exports, including automobiles, staving off a trade war that could have delivered a hammer blow to the global economy. The pact was concluded less than a week before a Friday deadline for U.S. President Donald Trump's higher tariffs to take effect and was quickly praised by several European leaders, including German Chancellor Friedrich Merz and Italian Prime Minister Giorgia Meloni, who called it "sustainable.' Trump and European Commission President Ursula von der Leyen announced the deal Sunday at his golf club in Turnberry, Scotland, although they didn't disclose the full details of the pact or release any written materials. "It's the biggest of all the deals,' Trump said, while von der Leyen added it would bring "stability' and "predictability.' The euro advanced over all Group of 10 peers in early Sydney trading with the spot up 0.3% to 1.1773 after closing up 1% last week. The deal would leave EU exports facing much higher tariffs than the bloc would charge for imports from the U.S., with von der Leyen saying the aim is to rebalance a trade surplus with the U.S. But those kinds of tradeoffs in the agreement angered some European industry groups, with Germany's main lobby saying it "sends a fatal signal to the closely intertwined economies on both sides of the Atlantic.' Von der Leyen and Trump also differed on some of the key terms of the deal they announced. The U.S. president said the tariff level would apply to "automobiles and everything else,' but not pharmaceuticals and metals. Steel and aluminum "stays the way it is,' the U.S. president added, and drugs are "unrelated to this deal.' The chief of the EU's executive arm said later at a news conference that the 15% rate would be all inclusive, wouldn't stack on top of industry-specific tariffs and would cover drugs, chips and cars. Metals duties "will be cut and a quota system will be put in place,' she said. "We have 15% for pharmaceuticals. Whatever the decisions later on is, of the president of the U.S., how to deal with pharmaceuticals in general globally, that's on a different sheet of paper,' von der Leyen said, adding that the overall rate "is not to be underestimated but it was the best we could get.' The EU agreed to purchase $750 billion in American energy products, invest $600 billion in the U.S. on top of existing expenditures, open up countries' markets to trade with the U.S. at zero tariffs and purchase "vast amounts' of military equipment, Trump said. Von der Leyen said no decisions have been made on European wine and spirits, but the matter would be sorted out soon. Key to getting the 15% rate to apply to pharmaceuticals and semiconductors was the bloc's promise to make U.S. investments, according to people familiar with the matter. Ahead of the meeting, the EU was expecting a 15% charge on its imports to also apply to most pharmaceuticals. The products had been one of the negotiation's main sticking points. Without a deal, Bloomberg Economics estimated that the total U.S. average effective tariff rate would rise to nearly 18% on Aug. 1 from 13.5% under current policies. The new deal brings that number down to 16%. For months, Trump has threatened most of the world with high tariffs with the goal of shrinking U.S. trade deficits. But the prospect of those duties — and Trump's unpredictable nature — put world capitals on edge. In May, he threatened to impose a 50% duty on nearly all EU goods, adding pressure that accelerated negotiations, before lowering that to 30%. The transatlantic pact removes a major risk for markets and the global economy — a trade war involving $1.7 trillion worth of cross-border commerce — even though it means European shipments to the U.S. are getting hit with a higher tax at the border. The goals, Trump said, were more production in the U.S. and wider access for American exporters to the European market. Von der Leyen acknowledged part of the drive behind the talks was a reordering of trade, but cast it as beneficial for both sides. "The starting point was an imbalance,' von der Leyen said. "We wanted to rebalance the trade we made, and we wanted to do it in a way that trade goes on between the two of us across the Atlantic, because the two biggest economies should have a good trade flow.' The announcement capped off months of often tense shuttle diplomacy between Brussels and Washington. The two sides appeared close to a deal earlier this month when Trump made his 30% threat. The EU had prepared to put levies on about €100 billion ($117 billion) — about a third of American exports to the bloc — if a deal wasn't reached and Trump followed through on his warning. U.S. and European negotiators had been zeroing in on an agreement this past week, and the decision for von der Leyen to meet Trump at his signature golf property brought the standoff to a dramatic conclusion. Officials had discussed terms for a quota system for steel and aluminum imports, which would face a lower import tax below a certain threshold and would be charged the regular 50% rate above it. The EU had also been seeking quotas and a cap on future industry-specific tariffs. The EU for weeks indicated a willingness to accept an unbalanced pact involving a reduced rate of around 15%, while seeking relief from levies on industries critical to the European economy. The U.S. president has also imposed 25% duties on cars and double that rate on steel and aluminum, as well as copper. Several exporters in Asia, including Indonesia, the Philippines and Japan, have negotiated reciprocal rates between 15% to 20%, and the EU saw Japan's deal for 15% on autos as a breakthrough worth seeking as well. Washington's talks also continue with Switzerland, South Korea and Taiwan. Trump said he is "looking at deals with three or four other countries' but "for the most part' others with smaller economies or less significant trading relationships with the U.S. would receive letters simply setting tariff rates. Trump announced a range of tariffs on almost all U.S. trading partners in April, declaring his intent to revive domestic manufacturing, help pay for a massive tax cut and address economic imbalances he has said are detrimental to U.S. workers. He put them on pause a week later when investors panicked. Trump's decades-old complaints about the global trading system heap particularly sharp scorn on the EU, which he has accused of being formed to "screw' the U.S. The bloc was established in the years following World War II in order to establish economic stability on the continent. The president has lashed out at nontariff barriers for American companies to do business across the 27-nation bloc. Those include the EU's value-added tax, levies on digital services, and safety and environmental regulations. Weeks of negotiations tested the EU's willingness to digest what is seen as an asymmetrical outcome, a senior EU diplomat said, but one that offers an opportunity to continue the talks without escalating further.
NHK
5 hours ago
- NHK
Trump says US, EU agree on 15% tariff
US President Donald Trump says he has reached a tariff agreement with the European Union. He met European Commission President Ursula von der Leyen in Scotland on Sunday. After the talks, the two spoke to reporters. Trump had said Washington would impose a 30 percent levy on goods from the EU starting on August 1. But he said the rate will be set at 15 percent. Trump explained that automobiles and nearly everything else will be subject to that rate. But he said the 50 percent tariff on steel and aluminum imports will remain unchanged. Trump said the EU is going to agree to buy 750 billion dollars' worth of energy from the US and make new investments of 600 billion dollars in the country. Trump also said all of the EU countries will be opened up to trade with the US at a zero tariff. He said he thinks the agreement is the biggest deal ever made. Von der Leyen said they reached a trade deal between the two largest economies in the world, and that it will bring stability and predictability.
Japan Times
16 hours ago
- Japan Times
The Fed needs to tread carefully with this strange dollar
The U.S. economy hasn't seen tariffs like these in around 80 years. Given the lack of recent precedent, the Federal Reserve is right to wait on more evidence that consumer prices aren't spiking before proceeding with interest rate cuts. There's another reason to tread carefully in these uncertain times: The extremely unusual behavior of the U.S. dollar. Many economists — including Council of Economic Advisers Chair Stephen Miran — expected the buck to strengthen when U.S. President Donald Trump implemented tariffs. In an essay published last November, Miran wrote that the exchange rate was "more likely than not' to appreciate alongside an improving trade balance, as it did during Trump's first trade war in 2018 and 2019. The so-called currency offset was critical to his view that the new duties wouldn't necessarily be passed through to consumers, at least not entirely. Treasury Secretary Scott Bessent made the same point during his confirmation hearings. Bafflingly, the dollar actually weakened for reasons that are still hotly debated (more on that shortly.) The U.S. dollar Index has declined by 6.8% since just before the "Liberation Day' tariffs unveiled on April 2 and it's down about 10% in 2025, the worst year-to-date performance in at least a quarter century. The median forecaster surveyed by Bloomberg expects the greenback to depreciate further over the next year or so. All else equal, you might expect the upward pressure on U.S. consumer prices to be even worse than tariffs alone would suggest. In the past, for a given move in developed nation currencies, economists have identified long-run pass-through into import prices on the order of 60%. (Estimates were around 40% for the U.S. specifically.) But pass-through is highly context-dependent and all else is never equal. So far, measures of consumer inflation remain relatively tame, either because the transmission will take time to materialize; retailers are "eating' the higher costs in the form of narrower margins; or because the doomsayers were just plain wrong. Realistically, it could even be some combination of the three. Given that range of possibilities, it's prudent to wait for the data to tell the story, exactly as Fed Chair Jerome Powell is currently planning. This is much to the chagrin of Trump, who regrettably insists that he can have tariffs and expeditiously lower policy rates too. In an ill-advised effort to get his way, he's exerting extraordinary public pressure on the independent central bank and its outgoing chair. So why is the dollar weakening in the first place? In the heat of the April selloff, many of us interpreted it as a sign of cracks in America's "exorbitant privilege.' The idea was that the U.S. — with the world's deepest and most liquid markets — had long occupied a special place at the center of the global financial system. That special status meant that we probably had a slightly stronger currency and relatively lower borrowing costs than would otherwise have been the case. When the the dollar weakened alongside rising borrowing costs after April 2, an argument advanced in market commentary and academia was that haphazard policymaking was eroding the American brand in the eyes of the world. Another somewhat related argument was tied to capital flows. At the time of the tariff announcement, investors around the world were extremely exposed to U.S. equities, thanks in part to the remarkable outperformance of the U.S.'s mega-cap growth stocks, known as the Magnificent 7. From the start of 2020 until March 2025, the S&P 500 Index had outperformed the rest of the developed world's equity markets by more than two-to-one. Global investors had piled into the stocks to get a piece of the action, often through unhedged positions. The hasty unwind of some holdings briefly created a macroeconomically significant wave of outflows. Plausible as these theories may be in explaining that wild week or so in early April, it's far from clear that the narratives around cracks in U.S. exorbitant privilege and equity outflows are still reasons to bet against the dollar going forward. As far as the former is concerned, America's brand may suffer additional damage from Trump's overt threats to Fed independence. But we're talking about a very nuanced change: a move from an extraordinarily special status in global markets to just very special. In practice, there's still no viable alternative to U.S. debt and its currency. European debt markets lack our market depth and China lacks our transparency, while Bitcoin is as volatile as a tech stock. Meanwhile, a solid streak of Treasury auctions has more or less ended the debate about caution among overseas investors. In the U.S. equity market, the panic is in the rearview mirror. Since bottoming on April 8, the S&P 500 has returned to all-time highs and is again outperforming the rest of the developed world's markets. The story isn't over, though. While the dollar hasn't weakened much more from its April lows, the durability of the move makes it more likely that currency weakness will have a meaningful impact on the economy, including consumer prices. In recent weeks, the greenback seems to have resumed its typical correlation with Treasury yields, opening the door to further declines if markets begin to price in significant rate cut expectations. That's why the Fed needs to proceed with extreme caution. Policymakers shouldn't lower borrowing costs and implicitly weaken the exchange rate until they can be sure that higher consumer prices aren't already in train. Without question, they should hold rates at their July meeting and the inflation data would need to stay quite tame to justify a cut at the subsequent meeting in September, at least in the absence of a labor market deterioration. The tariff experiment, coupled with the shock exchange-rate reaction, is an event study unlike any other in recent memory and the stewards of stable prices can't take anything for granted. Even if prices do jump, it's still possible that the uptick won't lead to a lasting increase in the rate of inflation and the Fed can eventually get on with easier monetary policy. But at this point, the responsible option is to wait and see how it plays out in the data. Jonathan Levin is a columnist focused on U.S. markets and economics. He is a CFA charterholder.
