NEW YORK, Aug 21 (Reuters Breakingviews) – The surge in U.S. tariff revenue, which climbed 131% year-on-year to $127 billion by July, and a narrowing trade gap in June to its lowest since late 2023, may appear to signal success for aggressive trade policies. Recent agreements between Washington and Brussels on automotive tariffs, pharmaceuticals, and major procurement commitments reinforce the idea that American economic leverage remains formidable. The U.S., responsible for approximately 30% of global consumer spending according to data from the Bureau of Economic Analysis and the World Bank, holds significant sway over foreign governments and corporations. This influence is being used to extract investment pledges and regulatory concessions, such as Europe’s commitment to purchase $750 billion in U.S. energy products and $40 billion in AI chips. The administration claims $5.1 trillion in total investment promises, though these figures come with substantial caveats.
However, this approach carries steep economic costs. Effective tariff rates now match levels last seen in 1933, and customs duties could amount to 2.6% of GDP, according to Yale’s budget lab. Such levies function as broad-based taxes that suppress consumer spending, increase prices, and hinder near-term economic expansion. While S&P 500 companies reported a blended net profit margin of 12.8% in Q2—above the five-year average—seven sectors, including energy and real estate, saw year-over-year profit declines.
Consumer spending, adjusted for inflation, was flat in June compared to the prior year, limiting firms’ ability to pass on rising input costs, even as the Institute for Supply Management’s manufacturing price index reached multi-year highs in July. If households remain financially strained, corporate earnings will eventually weaken. Historically, open trade has been a pillar of U.S. economic dominance. A shift toward protectionism may provoke countermeasures: European business activity reached a 14-month high in July, possibly reflecting firms hedging against American policy instability. Ultimately, tariffs could erode the very foundation of U.S. economic leadership.
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Weaponizing US economic might will weaken it
NEW YORK, Aug 21 (Reuters Breakingviews) – American trade warriors may be keen to claim early victory. Tariff revenue has surged, opens new tab 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, opens new tab and pharmaceuticals to major purchase pledges, opens new tab. 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. n nThe United States is an economic colossus, accounting for roughly 30% of global consumption, an estimate derived from Bureau of Economic Analysis, opens new tab and World Bank, opens new tab 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. n nSign up here. n nAn 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, opens new tab. 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. n nThis aggressive strategy comes at a price. The average effective tariff rate stands at a level last seen in 1933, opens new tab, while the total customs-duty take could reach 2.6% of gross domestic product, according to Yale’s budget lab, opens new tab. This is, effectively, a tax that will dampen consumption, raising prices and trimming near-term growth, Yale reckons. n nFor now, U.S. corporations seem fine. The blended net profit margin of S&P 500 Index constituents reached, opens new tab 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. n nConsumer spending is already softening, flat, opens new tab 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, opens new tab of the past three years in July. n nWhen 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, opens new tab 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. n nFollow Sebastian Pellejero on LinkedIn, opens new tab. n nContext News n nFor more insights like these, click here, opens new tab to try Breakingviews for free. n nEditing by Jonathan Guilford; Production by Maya Nandhini n nBreakingviews n nReuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time. n nSign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors. n nSebastian Pellejero is a U.S. columnist for Reuters Breakingviews, based in New York. He writes about topics across business, investing, markets and technology. Prior to joining in March 2025, he worked as an equity research analyst at BlackRock and a markets reporter for The Wall Street Journal, along with stints at Bloomberg and Debtwire. He is a graduate of Wake Forest University and speaks Spanish.