Event Overview
• Tariff details: Starting August 1, a 25% tariff will be comprehensively imposed on Japanese and Korean goods exported to the U.S., independent of specific tariffs for other industries (such as 50% for steel, 25% for automobiles). Japan's tariff has been raised 1% from the 24% announced on 'Liberation Day' in April, while Korea remains unchanged at 25%.
• Trump's position: In letters to Japanese Prime Minister Shigeru Ishiba and South Korean President Lee Jae-myung, Trump stated that the U.S. has long faced a huge trade deficit with Japan and South Korea, which poses a threat to the economy and security. He encouraged Japanese and Korean companies to set up factories in the U.S. to avoid tariffs and warned that if Japan and South Korea take retaliatory tariffs, the U.S. will impose equivalent tariffs.
• Negotiation space: Although Trump referred to the tariff letter as a 'final solution', he also hinted that if Japan and South Korea propose new plans (such as further market opening or removal of trade barriers), the U.S. may adjust the tariff rates. Additionally, the tariff suspension period has been extended from July 9 to August 1, allowing room for negotiations.
Market Reactions
• U.S. stock market volatility: Following the announcement, the three major U.S. stock indices fell, with the Dow Jones Index dropping 422 points (0.94%), S&P 500 down 0.79%, and NASDAQ down 0.92%. Companies relying on Asian supply chains, such as Tesla, showed significant declines (e.g., Tesla fell 6.8%).
• Differentiation in the Asia-Pacific market: Japanese and South Korean stock markets unexpectedly rose in early trading, with the Nikkei 225 futures briefly up 0.45% and the Korean Kospi index up 1.46%, reflecting cautious optimism in the market regarding negotiation prospects. However, the Taiwan Futures Night Market flipped from positive to negative, indicating uncertainty in the regional market.
• Other impacts: The tariff news has intensified investors' concerns about escalating trade wars, potentially raising import-driven inflation and affecting global supply chains. Japan and South Korea's automotive, electronics, and semiconductor industries are expected to be the most affected.
Japan and South Korea's Response
• Japan: Prime Minister Shigeru Ishiba expressed 'extreme regret' but emphasized that negotiations have made progress (such as avoiding a tariff increase to 30%-35%). Japan will accelerate negotiations with the U.S. before August 1 to defend its interests and hinted that the content of the tariff letter may be adjusted based on Japan's response.
• South Korea: The South Korean Ministry of Trade, Industry and Energy stated that the U.S. has effectively postponed the implementation of tariffs, and South Korea will actively push for negotiations to achieve lower rates or exemptions. South Korea has not yet threatened retaliation, showing a cautious attitude.
• Risk of retaliation: If Japan and South Korea take retaliatory tariffs, it may trigger a tariff spiral, further impacting global trade. Trump has warned that any circumvention of tariffs will face higher rates.
Background and Motivation
• Trade deficit: Trump believes that the U.S. trade deficit with Japan and South Korea (approximately $60 billion deficit with Japan and $40 billion deficit with South Korea in 2024) harms U.S. manufacturing and employment. He advocates using tariffs to force trade partners to open markets or shift production to the U.S.
• Policy Continuation: This tariff is a continuation of Trump's trade protectionism in his second term. On April 2, 2025, he announced reciprocal tariffs on 'Liberation Day', with initial rates ranging from 10% to 50%, later suspended for 90 days (until July 9) to facilitate negotiations. Now, as negotiations progress slowly, Trump has chosen to impose high tariffs on 14 countries (including Japan and South Korea).
• Geopolitical Considerations: Although Japan and South Korea are important allies of the U.S., Trump's tariff policy shows that he prioritizes economic interests over traditional alliances. This move may also push Japan and South Korea to explore regional free trade agreements (such as China-Japan-South Korea FTA) to reduce reliance on the U.S.
Potential Impacts
1. Impact on Japan and South Korea:
• Japan: Aging and trade deficits make Japan's manufacturing sector vulnerable; a 25% tariff may exacerbate import-driven inflation, further depress the birth rate, and weaken the competitiveness of industries like automobiles and electronics.
• South Korea: Semiconductor and automobile exports may be severely impacted. If tariffs are implemented long-term, it may force South Korean companies to accelerate U.S. factory establishment or shift to other markets.
2. Impact on the U.S.:
• Tariffs may push up import prices, increasing consumer burdens and triggering inflationary pressures.
• If Japan and South Korea reduce exports to the U.S., the U.S. supply chain may face shortages, affecting domestic market stability.
3. Global Trade:
• The tariff war may trigger a chain reaction, prompting other countries to take retaliatory measures, impacting the free trade order under the WTO framework.
• The Asian supply chain may accelerate regionalization, with companies possibly shifting to markets with lower tariffs (such as the EU and the Middle East).
Future Outlook
• Key to negotiations: The window for negotiations between Japan, South Korea, and the U.S. is before August 1. Japan and South Korea may seek to lower tariffs by opening agricultural markets (such as Japanese rice, Korean pork and beef) or committing to investments in the U.S.
• Other countries: Trump has announced tariff rates for 14 countries (including Malaysia, Kazakhstan 25%, Laos, Myanmar 40%, etc.). Taiwan, the EU, and others have yet to receive a letter, but more trade announcements are expected within the next 48 hours.
• Market Perspective: Some analyses suggest that the impact of tariffs may be limited, as negotiations between the EU and the U.S. are progressing smoothly, and Japan and South Korea also tend to compromise rather than confront. Expectations of interest rate cuts by the Federal Reserve may alleviate market pressures, but geopolitical risks remain a concern.
Conclusion
Trump's imposition of a 25% tariff on Japan and South Korea is the latest move in his trade protectionist policy, causing short-term volatility in financial markets and potentially reshaping the global trade landscape in the medium to long term. Japan and South Korea's cautious responses indicate their preference to resolve the crisis through negotiations, but the chain reaction of the tariff war may still affect the global economy. It is advisable to closely monitor negotiation progress before August 1 and the subsequent tariff announcements for other countries.