# Europe and Japan Strike Trade Agreements with the U.S., but Economic Slowdown Expected in Late 2025

- Link: https://www.thailand-business-news.com/china/237000-europe-and-japan-strike-trade-agreements-with-the-u-s-but-economic-slowdown-expected-in-late-2025
- Published: 2025-08-03T23:24:00+07:00
- Author: News Desk

**Europe and Japan signed trade agreements with the U.S., but anticipate economic
slowdowns in 2H25. China may increasingly rely on domestic consumption for growth
amid declining exports.**

## Europe

**Europe reached a trade agreement with the U.S. just before the August 1 deadline.
However, tariff hikes could cause a greater economic slowdown and pave the way for
further rate cuts in 2H25.** At its July 24 meeting, the European Central Bank (
ECB) decided to keep its policy rate unchanged at 2.00%, amid inflation stabilizing
near its 2% target.

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**The U.S. and Europe reached an agreement just before the August 1 deadline, under
which import tariffs on European goods were reduced to 15% (from the previously 
threatened rate of 30%). In return, Europe agreed to open its markets to U.S. goods
by reducing tariffs to 0%, and committed to purchasing USD750 bn worth of energy
from the U.S., investing another USD600 bn in the U.S., and buying U.S. military
equipment. However, other tariffs—such as those on steel and aluminum—remain unchanged
at 50%. The negative impact of tariffs—significantly higher than last year—is expected
to hit European economy, strengthening the case for the ECB to resume rate cuts.
Krungsri Research expects that the ECB may cut its policy rate by another 50bps 
to 1.50% by year-end.**

## Japan

**The trade agreement with the U.S. helped reduce downside risks to the Japanese
economy in 2H25.** In July, the preliminary Manufacturing PMI returned to contraction
territory at 48.8, down from 50.1 in the previous month. Meanwhile, Tokyo CPI slowed
for the second straight month to 2.9% YoY, falling below 3% for the first time since
March.

**Japan reached a trade agreement with the U.S., under which all goods, including
automobiles, will be subject to a 15% retaliatory tariff—down from the previously
threatened 25% rate. In return, Japan agreed to import key U.S. products such as
cars, trucks, and other agricultural goods. This deal is seen as reducing downside
risks to Japan’s economy. At the same time, although the ruling party lost the upper
house election and now holds a minority in both houses of parliament, PM Shigeru
Ishiba insisted he would not resign, easing concerns over a potential political 
vacuum. Nevertheless, given Japan’s sluggish growth and increasing pressure from
U.S. tariffs in 2H25—alongside easing inflation—Krungsri Research expects the BOJ
to maintain interest rates through the end of this year.**

## China

**China’s economy may need to rely more on consumption in 2H25 to maintain growth
momentum.** In 2Q25, consumption contributed 52% to GDP growth, while net exports
accounted for 23%—a sharp fall from 40% in 1Q25, in line with weaker exports during
May–June. Meanwhile, the government has launched a mega dam construction project
in Tibet worth CNY 1.2 mn.

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**China’s exports in 2H25 are likely to weaken due to the trade war, stemming both
from direct U.S. tariffs on China and U.S. tariffs on ASEAN countries, which China
has used to reroute its exports. Thus, China may be unable to rely on exports to
support growth as much as in the past and may need to turn more toward consumption.
However, fundamentally, consumption growth remains subdued and relies on stimulus.
Although consumer confidence has improved to some extent, it remains 30% below pre-
COVID levels. In 1H25, per capita income grew 5.3% YoY, lower than the 8–9% seen
during 2017–2019. Thus, looking forward, the government should focus on increasing
household income by restoring wealth tied to the property sector and stimulating
investment for continuous employment.**

**Keep an eye on Thailand–U.S. trade deal: A crucial factor shaping Thai investment
and export prospects**

**Thai export value in June grew at a double-digit rate for the 6th consecutive 
month. A 36% tariff scenario could cost THB 164 bn in Thai export losses. **The 
Ministry of Commerce reported that Thai export value in June reached USD 28.6 bn,
marking a 15.5% YoY increase. Excluding oil-related and gold products, exports grew
by 15.6%. Key export items that saw significant growth included computers & accessories,
hard disk drives, electronic circuits and agricultural products—especially fresh,
chilled, frozen, and dried fruits, which rebounded strongly. On the export destinations
side, most major markets posted solid growth, particularly key partners such as 
the United States, China, the EU, and ASEAN. For the first half of 2025, total export
value stood at USD 166.9 bn, up 15.0% YoY.

**Thailand’s export outlook for the second half of the year faces significant downside
risks. Although exports to the U.S. surged by 29.7% in 1H25, it was driven largely
by front-loaded orders ahead of the higher tariffs set to take effect on August 
1. This stockpiling effect raises concerns of tariff impacts in the coming months.
Krungsri Research estimates that if Thailand fails to negotiate a reduction in U.
S. tariffs—resulting in Thai goods facing a 36% tariff, significantly higher than
key competitors in ASEAN and major economies (which face rates of around 15–20%)—
the country could suffer a long-term export loss of -1.55%, equivalent to THB 164
bn (or 0.88% of GDP). This impact is notably greater than the current situation 
under the 10% tariff rate, which causes an estimated loss of -0.65%. With no-deal
tariffs at 36%, Thailand’s export losses will worsen—second only among ASEAN in 
terms of changes in negative impact compared to the 10% tariff scenario (see chart).**

**Investment through the BOI shows some positive signs amid concerns over trade 
wars and geopolitical tensions. **The Board of Investment (BOI) reported that in
1H25, Thailand received 1,880 applications for investment promotion, a 38% YoY increase,
with a total investment value of THB 1.06 trn (+138% YoY). Key sectors with high
investment value included digital, electronics & electrical appliances, automotive&
parts, renewable energy generation, and agriculture & food processing. Foreign Direct
Investment (FDI) accounted for 1,369 projects (+59%) with a total value of THB 740
bn (+132%), led by investors from Singapore, Hong Kong, and China.

**A rise in both the number of applications for BOI privileges and their value of
investment in the first half of the year signaled a positive outlook for private
investment recovery. However, based on structural issues, investments remain concentrated
in a few sectors, led by large-scale data centers. While this industry holds long-
term potential, it may not generate widespread value-added benefits or employment
across the domestic supply chain. In addition, the uncertainty surrounding U.S. 
tariff policies remains a key structural pressure that could influence investment
decisions—especially in industries reliant on exports and global supply chains. 
If Thailand fails to negotiate a reduction in the reciprocal tariff from 36% to 
a level closer to that of regional competitors (mostly around 19–20%), it could 
undermine the competitiveness of domestic producers and delay future investment 
decisions. Moreover, recent tensions between Thailand and Cambodia could further
dampen investor sentiment in the current environment.**

In recent developments, Europe and Japan have successfully negotiated trade deals
with the United States, aimed at fostering economic collaboration and strengthening
their respective markets. These agreements are expected to ease tariffs and promote
the exchange of goods, creating a more favorable environment for businesses on both
sides. As global economies increasingly intertwine, such partnerships are crucial
for maintaining competitive advantage.

However, analysts forecast an economic slowdown for both Europe and Japan in the
second half of 2025. Factors contributing to this predicted downturn include rising
inflation, geopolitical tensions, and supply chain disruptions, all of which could
hinder growth prospects. As these regions navigate their economic landscapes, the
effectiveness of their newly forged trade agreements will be put to the test.

In light of these challenges, China may find itself leaning more heavily on domestic
consumption to sustain its economic momentum. With external demand facing uncertainties,
boosting internal markets will be essential for China to maintain stability and 
growth moving forward.
[Read More](https://www.krungsri.com/en/research/macroeconomic/weekly/20250729)