"Analysis" The US-Japan trade agreement sets a benchmark, and the global economy may avoid the worst-case scenario

Reuters Frankfurt, July 23 - Economists say that the trade agreement reached between Japan and the United States can serve as a benchmark for other trade agreements currently being negotiated with the U.S., as the global economy can roughly withstand a tariff level of 15%.

The Japan-U.S. agreement reduces the auto import tariff from the previous 27.5% to 15%. Tariffs on other Japanese goods, which were set to take effect on August 1, will also drop from 25% to 15%. The agreement also includes Japan's commitments to U.S. investments and loans.

The agreement reached with Japan is the most significant achievement in a series of agreements made by U.S. President Trump to date. It puts pressure on China and the European Union, which are also facing an August deadline.

Some economists believe that while a 15% tariff is still high, it remains within a manageable range and is less damaging than the volatility caused by uncertainty. Uncertainty makes it nearly impossible for businesses to plan investments.

"The average tariff rate in the U.S. in 2024 is about 2.5%, while the current average tariff is around 17%," said Mohit Kumar of Jefferies Financial Group.

"Although the recent agreement suggests that the tariff numbers may be slightly higher, our basic assumption remains that when the dust settles, the average tariff may be around 15%," Kumar said. "From a macro perspective, it is negative, but the world can coexist with a tariff rate of around 15%."

On Wednesday, financial markets breathed a sigh of relief.

Auto stocks surged, leading the stock market higher.

The Japanese stock market's Nikkei index (.N225) soared due to the Japan-U.S. trade agreement, while European stock markets also rose, driven by automakers, as market optimism about reaching a viable agreement grew.

Derek Halpenny, head of research at Mitsubishi UFJ Financial Group (MUFG) in London, said, "It seems that the tariff benchmark for major economies will be 10-15%, while smaller economies may be slightly higher."

Volvo's (VOLCARb.ST) stock price jumped over 10%, while companies with significant sales in the U.S., such as Germany's Porsche (P911_p.DE), BMW (BMWG.DE), Mercedes-Benz (MBGn.DE), and Volkswagen (VOWG.DE), saw their stock prices rise by 4% to 7%.

Jim Reid of Deutsche Bank said, "The trade news is more positive and does help alleviate investors' concerns about tariffs rising again on August 1."

"Of course, the threat of hefty tariffs still looms for several large economies, including the 30% tariff facing the EU, 35% for Canada, and 50% for Brazil," Reid added. "From experience, we also know that it may take until just hours before the deadline to know the outcome."

Following the announcement of the Japan-U.S. agreement, the indicator measuring long-term inflation expectations in the U.S. (USIL5YF5Y=R) slightly declined, indicating that the trade agreement may have alleviated some concerns about prices and provided room for the Federal Reserve (FED) to cut interest rates later this year China still faces significant pressure. Before the deadline of the China-U.S. tariff truce on August 12, if no agreement is reached or the negotiation period is extended, U.S. tariffs may revert to 145%, while Chinese tariffs may revert to 125%.

"The U.S.-Japan agreement will put greater pressure on other major exporting countries in Asia, forcing them to reach better agreements. We have already seen trade agreements reached with the Philippines and Indonesia. More agreements with Asian exporting countries should be reached before August 1."