This Friday, an extra deadline that President Trump granted countries to negotiate new trade agreements with the U.S. expires, and, at last, there is some progress. Over the past week, the U.S. has reportedly reached two major agreements: one with Japan and a preliminary one with the European Union.
Starting with Japan, the countries agreed that the U.S. would impose tariffs of 15% on Japanese imports, instead of the 25% it had previously threatened. In addition, Japanese Prime Minister Shigeru Ishiba announced that, starting in April, tariffs on automobiles and auto parts will be reduced from 27.5% to 15%.
To this end, according to Trump, the “Land of the Rising Sun” has agreed to invest around $550 billion in the United States, with 90% of the profits expected to remain in the US economy. The only thing is that it is unclear where this money will actually come from, especially given Japan's huge national debt problem.
In general, the final terms of the trade deal have not yet been officially confirmed. The problem is that Japan is going through a domestic political crisis, which further complicates matters. This is probably why, although Japan's Nikkei 225 index rose and USD/JPY fell after the news broke, Japanese 10-year bond yields also surged.
If those yields continue to rise, they could negatively affect the S&P 500, as global capital could start flowing back into Japan due to more attractive yields, a scenario reminiscent of the carry trade reversal in July 2024, which caused disruptions not only in the U.S. market but also in the European market.
The situation with the EU agreement is even more uncertain. Although nothing has been signed yet, some EU member states are expressing their discontent and warning that the agreement could affect their national economies, especially France and Germany, by harming their manufacturing industries.
In concrete terms, the U.S. will reportedly set a 15% import tariff on EU products. This rate would apply to automobiles, pharmaceuticals, and semiconductors. In return, the EU would invest $600 billion in the U.S. economy and buy $750 billion worth of U.S. energy over the next three years.
Now, the problem is that the U.S. simply does not produce that much energy for export. In 2024, total exports of major U.S. energy products (crude oil, LNG, coking coal) amounted to only $165 billion. Therefore, those figures are physically impossible. Moreover, the EU's energy strategy is based on diversification, not dependence.
Thus, while markets may be celebrating the seemingly optimistic news about the agreements with Japan and the European Union, the reality of their final outlook is still far from clear. As for the possible extension of the deadline for raising tariffs on China, once again, postponing the problem is not the same as solving it.
