U.S. President Donald Trump has announced the implementation of 25% tariffs on imports from Japan and South Korea, effective August 1st. This novel trade commitment comes at a time when global macroeconomic conditions are marked by weak domestic demand in both countries. They’re contending with more acute economic insecurity. The tariffs will further complicate the situation for our closest U.S. allies. They are already under the pressure of crippling new tariffs on their auto and steel exports.
Japan’s Prime Minister Shigeru Ishiba has already voiced strong opposition to the rest of these tariffs’ collateral damage. He’s adamant that Japan will accept any trade agreement that does not remove auto tariffs. Automobiles are Japan’s most significant export to the United States, thus making this debate especially pivotal to the Japanese economy. South Korea has a high economic dependence on auto exports. This reliance positions the administration’s new tariffs as a dangerous weapon against the two countries’ largely export-promotional economies.
Norihiro Yamaguchi, our Lead Japan Economist at Oxford Economics, has recently made a daring bet. He estimates that Japan’s GDP will fall by 0.1 percentage points by the end of 2026 as a result of the tariffs. Exports account for almost 22% of Japan’s GDP and 44% of South Korea’s GDP this year. This extreme dependence on exports represents an enormous economic vulnerability.
Both countries are becoming aware of the negative effect of these heavy tariffs. In addition, they contend with a 25% importing levy on all automobiles and a shocking 50% tariff on steel and aluminum from almost all countries. In 2024, South Korea was the fourth-largest steel exporter to the U.S. This underscores the essential role these industries play in their respective economies.
At the moment, Japan finds itself teetering on the edge of a technical recession — two straight quarters of economic decline. With domestic consumption fading in face of punishing tariffs and a growing uncertainty about global trade, China’s economic outlook seems more dire by the day.
As economist Vishnu Varathan noted at the time, the deadlocked talks on sectoral tariffs have left U.S. trade negotiators steamed. He noted, “The frustration with Japan’s more principled and holistic approach stalling a deal being a source of frustration for U.S. trade negotiators, and crucially for Trump, speaks for itself.” This desire speaks to the difficulties of getting a deal done that works for both sides.
Despite these challenges, Prime Minister Ishiba remains hopeful about ongoing discussions with the U.S., stating that Japan “actively seeks the chance of an agreement that benefits both countries while protecting Japan’s national interest.” Most significantly, he assured that Japan will remain committed to trade discussions with the U.S., a hopeful sign of compromise and dialogue as tensions deepen.
The world’s major emerging market economist Frederic Neumann noted that financial markets are generally reacting with skepticism to the news of new and increased tariffs. He remarked, “Financial markets are taking the latest news in their stride, focusing on the possibility that the threatened tariffs may still be whittled down through negotiation.” This optimist’s take on realism indicates that there remains a space for discussion, particularly as both countries contend with increasing domestic and global pressures.
Analysts caution not to underestimate the ripple effect that these tariffs could have. Yamaguchi cautioned, “Given that the economy is already suffering from high tariffs on auto and elevated global trade policy uncertainty, weak consumption, the impact shouldn’t be dismissed.”