Tariff Truce and Agreements Mark
A New Phase for the Global Order

The EU-US “trade deal” agreed the 27 of July in the Turnberry golf course has been the subject of great controversy in Europe and undisguised glee by prominent members of the Trump Administration. According to USTR Grier the deal represents an historic agreement and provides the foundation for a reformed global trading system “that is fair, balanced, and oriented towards serving concrete national interests rather than vague aspirations of multilateral institutions”.1 The French Prime Minister, Francois Bayrou, has spoken instead of a “dark day” and an act of “submission”.

• 1.New York Times op ed August 7.

An assessment

A balanced assessment of the July agreement needs to consider both its economic and geopolitical implications.2 The most concrete element of the agreement is the tariff component. Here the US has agreed to apply a tariff rate of 15% that, unlike other agreements, includes the existing MFN rate and also applies to cars, pharmaceuticals semiconductors and lumber. The treatment of steel and aluminium still needs to be negotiated, although it may include a tariff quota. A number of sectors will only be subject to the MFN tariffs (including sectors with a tariff higher than 15%). The EU on its side will eliminate duties on all industrial products (other than steel and aluminium) and preferential market access for a wide range of agriculture and fisheries products.
The tariff deal would put the EU at close to parity with countries (other than Canada and Mexico) that have a free trade agreement with the US or which, like the UK, do not have a trade deficit with the US. The deal can be considered as a “tariff truce” that maintains a favourable competitive position for EU companies in relation to third countries. The EU tariff commitments will eliminate tariffs on substantially all US imports, but there is no similar commitment from the US. So, it is not possible to qualify the deal as an interim free trade agreement consistent with WTO Art XXIV.3
The non-tariff components are vaguer and more aspirational in nature. The main elements are 1) Projections about increased purchases of energy products and increased investments over a four-year time frame; 2) A commitment to reduce non-tariff obstacles to trade relating to car regulations, standards, conformity assessments and streamlining of sanitary certificates. This is based on reciprocal commitments and continues work already started during the times of the Transatlantic Trade and Investment Partneship. While there are some specific commitments relating to EU legislation like CBAM or Deforestation, these appear to be in line with the ongoing simplification agenda. 3) Generic provisions on cooperation on economic security and other areas of mutual interest. In principle the non-tariff commitments do not appear therefore to breach red lines or compromise the EU regulatory autonomy.
The backlash against the agreement is better assessed in geopolitical terms. This is the first time that the EU has accepted to conclude a trade agreement with the US that is manifestly unbalanced. Even worse the presentation of the agreement appears to endorse the US narrative according to which trade deficits are a signal of inbalances. Moreover the role of the EU as a linchpin of the multilateral trading system is compromised by being ready to offer preferential tariff access to the US in the absence of a WTO compatible free trade area.

• 2.Joint Statement on a US-EU framework on an agreement on reciprocal, fair and balanced trade, 21 August
• 3.Although Korea concluded a WTO compatible free trade agreement with the US, it is questionable whether Korean preferential treatment of the US is still justified once the US has introduced non time limited reciprocal tariffs.

The negative impact of tariffs on the Japanese economy will continue

Japan-US tariff negotiations, which have been ongoing since April, reached a surprise agreement on July 22nd (US time). Japan's reciprocal tariff rate, which was unilaterally announced by the Trump administration in July as 25%, will be reduced to 15% under this agreement. The 25% automobile tariff that has been in effect since April will also be reduced to 15%. Japan's new 15% reciprocal tariff went into effect on August 7th. The reduction of automobile tariffs to 15% is expected in September. The overall impact of the Trump tariffs on Japan's real GDP as a result of this agreement is estimated to be -0.55% (over a one-year period). Until automobile tariffs are reduced to 15%, the impact will be -0.60%. Compared to the -0.85% impact that would have occurred if the reciprocal tariffs had been raised to 25%, the negative economic impact of these tariffs is smaller. Nevertheless, the situation remains one of significant economic damage. A -0.55% reduction in real GDP would offset just over a year's worth of growth in Japan's real GDP on average. With domestic headwinds from rising prices and the resulting GDP-depressing effects of tariffs, we estimate there's about a 50% chance that the Japanese economy will fall into a moderate recession over the next year.

Japan Agrees to Expand Imports from the United States

According to a U.S. government announcement, under the Japan-U.S. tariff agreement, Japan will increase its imports of U.S. agricultural products, such as corn, soybeans, and bioethanol, by $8 billion. It will also immediately increase imports of U.S. rice by 75%. The Japanese government explained that the increase in U.S. rice imports will be within the existing minimum access (tariff-free or low-tariff import quota), but the total volume of rice imports will remain unchanged. In addition, Japan will purchase several billion dollars more of U.S. defense equipment annually. U.S. media reported that Japan's defense spending on U.S. companies will increase from $14 billion to $17 billion annually. Japan will also purchase U.S. commercial aircraft, including 100 Boeing aircraft. The two countries also agreed to explore a new agreement for liquefied natural gas (LNG) from Alaska. However, differences of opinion have emerged between the two countries regarding the Japan-U.S. agreement. The Japanese government has explained that the annual purchase of several billion dollars' worth of U.S. defense equipment is not an additional purchase based on the agreement, but is within the scope of existing plans.

Will this agreement only halve the trade surplus with the U.S.?

At the first meeting of the Japan-U.S. tariff negotiations, President Trump stated, "I want to eliminate the trade deficit with Japan." The ultimate goal is likely to be the elimination of Japan's trade surplus with the U.S. (the U.S. trade deficit with Japan), which reached ¥8.6 trillion in 2024. Let's examine the extent to which this agreement will contribute to reducing Japan's trade surplus with the U.S. First, it is estimated that the 15% reciprocal tariff will reduce Japan's exports to the U.S. by approximately ¥2.2 trillion (Table). Expanding imports of U.S. agricultural products will increase Japan's imports from the United States by 1.17 trillion yen. A $3 billion increase in defense equipment imports from the United States will increase Japan's imports from the United States by approximately 440 billion yen. The purchase of 100 Boeing aircraft will increase Japan's imports from the United States by 2.4 trillion yen, based on fiscal year 2024 performance. In total, this agreement will reduce Japan's trade surplus with the United States by approximately 6.2 trillion yen, which is approximately 70% of the 2024 trade surplus of 8.6 trillion yen. Even so, this will not eliminate the trade surplus. However, the Japanese government has explained that defense equipment imports are within the scope of existing plans, not additional purchases, and are therefore unlikely to contribute to an additional trade surplus with the United States. Furthermore, the purchase of 100 Boeing aircraft may include many aircraft that airline companies had already decided to purchase before the Japan-U.S. agreement was reached. If we recalculate the impact of the agreement assuming no additional defense equipment imports based on the agreement and only half of the 100 Boeing aircraft purchases are in accordance with the agreement, the reduction in Japan's trade surplus with the US would be approximately 4.57 trillion yen, roughly halving the 2024 trade surplus. Even with this agreement, the Trump administration's desired goal of eliminating Japan's trade surplus with the US (the US trade deficit with Japan) remains a long way off.