BREAKINGVIEWS-Weaponizing US economic might will weaken it

By Sebastian Pellejero

NEW YORK, Aug 21 (Reuters Breakingviews) - American trade warriors may be keen to claim early victory. Tariff revenue has surged 131% year-over-year to reach $127 billion by July. The trade deficit shrank in June to its smallest margin since late 2023. On Thursday, Washington and Brussels clarified new terms on everything from duties on cars and pharmaceuticals to major purchase pledges. The gambit is that the might of U.S. consumption is too tantalizing for governments and corporations abroad to ignore. Levies, investment promises, and an edge for homegrown industry are the fruits of this leverage. The fiscal reality of President Donald Trump’s hard-nosed approach, though, will sap Uncle Sam’s strength.

The United States is an economic colossus, accounting for roughly 30% of global consumption, an estimate derived from Bureau of Economic Analysis and World Bank data. A yawning trade deficit in goods – about $86 billion in June – is the flipside, an enormous opportunity for exporters worldwide. Tariffs and bespoke, country-by-country investment deals effectively weaponize this dynamic: pay your way, or lose access.

An oddball patchwork of duties and pledges, like the European Union’s declared intention to buy $750 billion of U.S. energy products and $40 billion of artificial intelligence chips, is the tenuous result. The administration claims $5.1 trillion in total promised inflows, says PolitiFact, with heavy caveats. To boot, it is attacking regulations that are bugbears of corporate America, extracting a promise of “flexibilities” from Europe on its planned tax on carbon-intensive imports and nudging Canada to drop a digital services fee.

This aggressive strategy comes at a price. The average effective tariff rate stands at a level last seen in 1933, while the total customs-duty take could reach 2.6% of gross domestic product, according to Yale’s budget lab. This is, effectively, a tax that will dampen consumption, raising prices and trimming near-term growth, Yale reckons.

For now, U.S. corporations seem fine. The blended net profit margin of S&P 500 Index constituents reached 12.8% in the second quarter, topping the five-year average, according to FactSet. But seven industries, including energy and real estate, posted year-over-year declines.

Consumer spending is already softening, flat year-over-year on an inflation-adjusted basis in June, per BEA data. That may restrain attempts to pass on rising costs, even as the Institute of Supply Management’s manufacturing price index notched among its highest readings of the past three years in July.

When consumers are too stretched for companies to raise prices without losing sales, earnings will suffer. It’s no accident that open trade has undergirded Uncle Sam’s economic strength. A turn away from it could even backfire: European business activity hit a 14-month high in July as firms hedge against U.S. uncertainty. Tariffs might yet prove a tax on the engine of American exceptionalism.

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CONTEXT NEWS

The U.S. and European Union released a joint statement on August 21 detailing the framework for their recently struck trade deal. The allies committed to applying the higher of either the Most Favored Nation rate or a 15% tariff on goods originating from the EU, while the US agreed to caps on additional tariffs implemented under Section 232 for industries such as lumber, semiconductors, and pharmaceuticals.

On August 19, S&P Global Ratings affirmed its credit score for the United States with a stable outlook, saying it expects revenues from newly instituted tariffs to help offset fiscal deterioration resulting from recent legislative changes.