The US and Europe have reached a preliminary trade agreement that is very similar to the recent US-Japan deal. Under the terms, tariffs on European steel remain at 50 per cent, while a 15 per cent tariff applies to other imports. That agreement is positioned halfway between the previously threatened 30 per cent reciprocal tariff and the pre-trade-war average of just a few per cent.
As with the Japan agreement, the deal includes several additional concessions that are short on details. Europe has pledged to purchase $750 billion in US energy products over the next three years and invest $500 billion in the US economy. So far, these commitments remain nonbinding verbal agreements.
Equity markets and the business press have largely viewed this announcement as a positive resolution to a long trade battle. Investor uncertainty has eased, and the US trade deficit appears to be narrowing, all with little apparent impact on the economy.
However, I expect the impact on US consumers to be significant. If the entire tariff increase is passed through to retail prices, the Consumer Price Index (CPI) could increase by as much as 1.8 per cent. So far, much of the price pressure has been muted, as importers have rushed shipments ahead of tariff deadlines, and many companies have delayed price increases amid uncertainty over final tariff rates.
In June, however, we began to see signs that this was starting to change. Retail prices rose for many imported goods. Since the prices importers paid to foreign suppliers remained essentially flat, this suggests that US consumers were beginning to absorb the added costs.
My estimate is that more than half of the tariff increase will be passed on to US consumers, amounting to roughly a 1 per cent increase to the average cost of living. While a price-level shift isn’t necessarily inflationary, it’s likely to prompt caution from the Fed and become a pocketbook issue for consumers.
These two trade agreements also raise questions about the future of the United States–Mexico–Canada Agreement (USMCA), which is up for renegotiation or renewal in 2026. Currently, goods that do not comply with USMCA rules of origin face a 25 per cent tariff. Notably, even USMCA-compliant automobiles and auto parts from Canada and Mexico are subject to this 25 percent tariff.
In contrast, automotive imports from Japan and Europe face a lower tariff rate of 15 per cent, putting Canada- and Mexico-based supply chains at a disadvantage. This has implications for American automakers such as General Motors, Ford, and Stellantis, that depend heavily on Canada and Mexico for parts and final assembly. It also harms Japanese automakers like Honda, Nissan, and Toyota, since they also depend on Canada and Mexico to produce their products.
Adding to these concerns, US firms warn that the 50 per cent Section 232 tariffs on steel and aluminum will further increase their domestic production costs, while Japanese auto makers benefit from lower rates on their imported inputs.
In trade terms, what really matters for Detroit is a reduction in tariffs on the vehicles it imports from Canada and Mexico, along with greater clarity on the treatment of parts. Vehicles produced in those two countries account for about 20 per cent, 30 per cent and 40 per cent of Ford’s, GM’s and Stellantis’ US sales, respectively, according to Morgan Stanley estimates. In June, GM announced a $4 billion reshoring program to reduce its exposure, though the full benefit of that investment won’t be felt until 2027.
These recent deals suggest that establishing a tariff-free trading framework with the US will be difficult. The outcome of future trade negotiations will carry significant implications for domestic manufacturing jobs. I expect the manufacturing sector will not emerge from this process unscathed.
Housing Affordability Watch
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