Tariffs have an optimal level, and market unrest could ensue if Trump's tariff policies veer significantly away from it
In a significant development, the United States and the European Union have reached a tentative trade deal as of July 27, 2025. This deal, which was finalized in a meeting between US President Donald Trump and EU Commission President Ursula von der Leyen, aims to bring stability and predictability for businesses on both sides.
Instead of the previously threatened 30% tariffs on EU goods entering the US, a 15% tariff will be imposed on the vast majority of EU products. Some products will benefit from a "zero-for-zero" tariff exemption scheme. This agreement avoids the threat of a full-scale tariff war that was looming.
Economists and experts suggest that a 30% tariff would have been highly disruptive. Such high tariffs typically increase costs for importers and consumers, potentially reducing demand. They also raise production costs for companies reliant on EU imports, squeezing profit margins. Furthermore, they trigger retaliatory measures, which could harm export sectors in the US. Lastly, they heighten market volatility and investor uncertainty.
Hence, the possibility of 30% tariffs likely would have caused significant negative reactions in stock markets, including sharp sell-offs in affected industries such as manufacturing, automotive, and consumer goods, and broader concerns about economic growth slowdown.
The agreed 15% tariff deal is expected to reduce these risks, bring relative calm to markets, and support investment by introducing more predictable trading conditions, though it still represents a new cost base for businesses engaged in transatlantic trade.
As the situation continues to develop, details are expected to evolve. Meanwhile, stock markets have responded positively to this news. On Friday, the Nasdaq Composite rose 0.2%, the S&P 500 gained 0.25%, and the Dow rose 0.15%. These indices are near all-time highs, and the Dow is less than 300 points away from hitting an all-time high.
However, the administration's push for trade deals with major partners such as Mexico, the European Union, and India continues to create underlying uncertainties. Despite these uncertainties, US stocks have rallied in recent days, with about 34% of companies in the S&P 500 having reported earnings results for the second quarter, and 80% posting earnings that beat expectations.
Wall Street has welcomed progress on the trade front with Indonesia, the Philippines, and Japan, including tariffs ranging from 15 to 19% and more clarity about where average tariff rates might land. The CBOE Volatility Index, or VIX, traded at its lowest level since February, signaling relative calm in markets.
In a separate development, President Donald Trump announced a trade deal with Japan, which unlocks new possibilities. The trade deal with Japan includes a 15% tariff on imports from Japan. Sarah Bianchi, chief strategist of international political affairs at Evercore ISI, warned that Trump is still pushing forward with an average tariff rate "far above anything the United States has seen in recent history."
Despite these ongoing trade tensions, "extreme greed" was the sentiment driving markets on Friday, according to CNN's Fear and Greed index. The S&P 500's 80% of companies that have reported earnings for the second quarter have posted earnings that beat expectations. The Dow flirted with closing at a record high, which would be its first since December.
In summary, the US-EU trade deal imposes 15% tariffs, lower than the threatened 30%, to avoid a tariff war. Markets are expected to respond more stably under the 15% tariff scenario than if 30% tariffs had been enacted. A 30% tariff would likely have caused market turmoil and economic disruption due to increased costs and retaliation risks.
- The agreed 15% tariff deal between the US and the EU, which is lower than the initially threatened 30%, is expected to support investment by introducing more predictable trading conditions in business, finance, and the stock-market.
- Economists and experts argue that a 30% tariff would have led to increased costs for importers and consumers, potentially reducing demand in the business sector, and thereby negatively impacting the stock-market.
- Despite ongoing trade tensions, positive responses on the trade front, such as the US-Japan trade deal that also includes a 15% tariff on imports from Japan, have fueled 'extreme greed' sentiment in the stock-market, as indicated by CNN's Fear and Greed index.
