In an unprecedented move for international trade, former President Donald Trump has begun to notify the United States’ (U.S.) largest trading partners of recently altered tariff rates. These domestic tariffs will have a major effect on their imports as well. Japan and South Korea would be hit with a crushing 25% tariff. The goal of this action, as Trump would have it, is to help repair years of trade deficits. This announcement follows deep negotiations with South Korean leaders. It has rattled international capital markets and raised serious questions about the future of U.S. trade relations with China and the world.
Worse still, Trump’s recent letters to each country clearly state that these 25% tariffs will be imposed on top of existing sector-specific tariffs. The letters with South Korea became very confrontational in nature. It warned of higher tariffs should the country attempt to avoid the new rate by transshipping products to third countries. The announcement has since sent shockwaves through the foreign exchange markets. Indeed, the Japanese yen and South Korean won have both recently hit multi-decade lows against the US dollar.
Implications for South Korea and Japan
The newly announced tariffs don’t stop there—they’re intended to remedy what President Trump has identified as unfairness about U.S. trade relationships with South Korea and Japan. These countries have been a long-time bugaboo of Trump’s administration due to what they view as unfair and illegal trade practices. By putting a blanket 25% tariff on all imports, he hopes to level the playing field for US manufacturers.
Just this week, Trump sent a personal letter to new South Korean President Yoon Suk-yeol. In it, he promised that South Korean companies would receive expedited approval to establish manufacturing facilities in the United States. They believe this step can help alleviate anxiety around the tariffs. It remains to be seen whether South Korean companies will decide to invest in U.S. manufacturing after all. The allure of local production runs deep. That might not be enough to tip the scales against the growing danger of increased tariffs and potential retaliatory measures.
In particular, market analysts were surprised to see the yen now as the weakest G10 currency. So far this year, it has fallen almost 1% against the US dollar. Likewise, the South Korean won isn’t doing any better as traders flee the currency in frustration over the implications of Trump’s trade policy. The resulting uncertainty around these tariffs has led to extreme instability across foreign exchange markets. Consequently, US market capitalization has dropped through the floor.
Potential for Further Tariffs
The 25% tariffs on Japan and South Korea are officially set in stone. In the meantime, Trump has indicated that he will roll out more ‘sector specific’ tariffs. This capacious strategy would only entrench an ever more complex trade dynamic and increase tensions between the US and its trading partners.
The letter underscored the message that any retaliatory tariffs imposed by Japan or South Korea would be met with a “forceful” response by the US. The result will be a supplementary 25% tariff on top of any retaliatory steps they take. This dangerous ramp up risked a retaliatory nationalistic cycle that will fracture diplomatic relations and upend decades of bilateral free trade agreement stability.
As one of the original investors, Trump’s letters to investors promised a siren song of returns. If South Korean companies opt to manufacture their products in the U.S., they would lower the tariff rate to 0%. This proposal would help jumpstart local production. This makes us wonder just how pragmatic or attractive it will be for firms already deeply entrenched in their home markets.
Market Reactions and Future Outlook
The new immediate market reaction to Trump’s tariffs announcement was one of panic. After the announcement broke, US stocks fell to session lows as investors contended with the confusion thrown into the mix by these new tariffs. The dollar continued its advance from earlier trading days, indicating a flight to safety due to increasing trade heightening in tensions.
While countries redesign their economic plans in retaliation to these tariffs, the ramifications in the long run are uncertain. Japanese and Korean companies need to reconsider their supply chains. They need to figure out the best ways to cut through the noise and confusion of today’s shifting US trade policy.