Trump is getting the world economy he wants — but the risk to growth
could spoil his victory lap
[July 29, 2025] By
JOSH BOAK and PAUL WISEMAN
WASHINGTON (AP) — President Donald Trump is getting his way with the
world economy.
Trading partners from the European Union to Japan to Vietnam appear to
be acceding to the president’s demands to accept higher costs — in the
form of high tariffs — for the privilege of selling their wares to the
United States. For Trump, the agreements, driven by a mix of threats and
cajoling, are a fulfillment of a decades-long belief in protectionism
and a massive gamble that it will pay off politically and economically
with American consumers.
On Sunday, the United States and the 27-member state European Union
announced that they had reached a trade framework agreement: The EU
agreed to accept 15% U.S. tariffs on most of its goods, easing fears of
a catastrophic trans-Atlantic trade war. There were also commitments by
the EU to buy $750 billion in U.S. energy products and make $600 billion
in new investments through 2028, according to the White House.
“We just signed a very big trade deal, the biggest of them all,” Trump
said Monday.
But there’s no guarantee that Trump’s radical overhaul of U.S. trade
policy will deliver the happy ending he’s promised. The framework
agreement was exceedingly sparse on details. Most trade deals require
months and even years of painstaking negotiation that rise and fall on
granular details.
High-stakes negotiations break Trump's way
Financial markets, at first panicked by the president’s protectionist
agenda, seem to have acquiesced to a world in which U.S. import taxes —
tariffs — are at the highest rates they’ve been in roughly 90 years.
Several billion in new revenues from his levies on foreign goods are
pouring into the U.S. Treasury and could somewhat offset the massive tax
cuts he signed into law on July 4.
Outside economists say that high tariffs are still likely to raise
prices for American consumers, dampen the Federal Reserve's ability to
lower interest rates, and make the U.S. economy less efficient over
time. Democrats say the middle class and poor will ultimately pay for
the tariffs.
“It’s pretty striking that it’s seen as a sigh of relief moment,” said
Daniel Hornung, a former Biden White House economic official who now
holds fellowships at Housing Finance Policy Center and the Massachusetts
Institute of Technology. “But if the new baseline across all trading
partners is 15%, that is a meaningful drag on growth that increases
recession risks, while simultaneously making it harder for the Fed to
cut.”
The EU agreement came just four days after Japan also agreed to 15% U.S.
tariffs and to invest in the United States. Earlier, the United States
reached deals that raised tariffs on imports from Vietnam, Indonesia,
the Philippines and the United Kingdom considerably from where they'd
been before Trump returned to the White House.
More one-sided trade deals are likely as countries try to beat a Friday
deadline, after which Trump will impose even higher tariffs on countries
that refuse to make concessions.
Trump's long-held theory now faces reality
The U.S. president has long claimed that America erred by not taking
advantage of its clout as the world's biggest economy and erecting a
wall of tariffs, in effect making other countries ante up for access to
America's massive consumer market.
To his closest aides, Trump's use of tariffs has validated their trust
in his skills as a negotiator and their belief that the economists who
warned of downturns and inflation were wrong. The S&P 500 stock index
was basically flat on Monday, but stocks have more than recovered from
the tariff-induced selloff in April.
“Where are the ‘experts’ now?” Commerce Secretary Howard Lutnick posted
on X.
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Sales team leader Jay Liang works at a Senti Senti store in New York
on Friday, July 25, 2025. (AP Photo/Yuki Iwamura)
 But the story is not over. For one
thing, many of the details of Trump's trade deals remain somewhat
hazy and have not been captured in writing. The U.S. and Japan, for
instance, have offered differing descriptions of Japan's agreement
to invest $550 billion in the United States.
“The trade deals do seem to count as a qualified win for Trump, with
other countries giving the U.S. favorable trade terms while
accepting U.S. tariffs,” said Eswar Prasad, a Cornell University
economist. "However, certain terms of the deals, such as other
countries’ investments in the U.S., seem more promising in the
abstract than they might prove in reality over time.''
Trump is also facing a court challenge from states and businesses
arguing that the president overstepped his authority by declaring
national emergencies to justify the tariffs on most of the world's
economies. In May, a federal court struck down those tariffs. And an
appeals court, which agreed to let the government continue
collecting the tariffs for now, will hear oral arguments in the case
Thursday.
And he's yet to reach an accord with China — which has deftly used
the threat of retaliatory tariffs and withholding exports of rare
earth minerals that are desperately needed for electric vehicles,
computer chips and wind turbines to avoid caving in to Trump's
demands. The U.S. and China are talking this week in Stockholm,
Sweden.
Economists remain skeptical of the impacts on US consumers
There is also skepticism that tariffs will produce the economic boom
claimed by Trump.
Analysts at Morgan Stanley said “the most likely outcome is slow
growth and firm inflation,” but not a recession. After all, the 15%
tariffs on the EU and Japan are a slight increase from the 10% rate
that Trump began charging in April during a negotiation period.
While autos made in the EU and Japan will no longer face the 25%
tariffs Trump had imposed, they will still face a 15% tax that has
yet to appear in prices at U.S. dealerships. The administration has
said the lack of auto price increases suggests that foreign
producers are absorbing the costs, but it might ultimately just
reflect the buildup of auto inventories to front-run the import
taxes.
“Dealers built stocks ahead of tariff implementation, damping the
immediate impact on retail prices. That cushion is starting to wear
thin,” Morgan Stanley said in a separate note. “Our Japan auto
analyst notes that as pre-tariff inventory clears, replacement
vehicles will likely carry higher price tags.”
Economist Mary Lovely of the Peterson Institute for International
Economics warned of a “slow-burn efficiency loss’’ as U.S. companies
scramble to adjust to Trump’s new world. For decades, American
companies have mostly paid the same tariffs – and often none at all
– on imported machinery and raw materials from all over the world.
Now, as a result of Trump’s trade deals, tariffs vary by country.
“U.S. firms have to change their designs and get inputs from
different places based on these variable tariff rates,’’ she said.
“It’s an incredible administrative burden. There’s all these things
that are acting as longer-term drags on economy, but their effect
will show up only slowly.’’
Mark Zandi, chief economist at Moody’s Analytics, said that the
United States’ effective tariff rate has risen to 17.5% from around
2.5% at the start of the year.
“I wouldn’t take a victory lap,'' Zandi said. ”The economic damage
caused by the higher tariffs will mount in the coming months.''
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