Trump will impose 25 percent duties on goods from Japan and South Korea and extend the pause

The US will impose uniform 25% duties on all imports from Japan and South Korea from August 1, Donald Trump announced. Several other countries, including Kazakhstan, have received his letters warning of higher trade fees. The pause in increased U.S. "retaliatory" duties for all countries with which Washington has not yet reached agreements will also be extended until Aug. 1, the White House said. The markets reacted to the new turn in the trade war with a sharp fall: the Dow Jones was losing more than 600 points at the moment.

The letters to the leaders of Japan and South Korea, which Donald Trump posted on the social media network Truth Social, say the 25 percent duties are being imposed separately and are not linked to additional industry duties already in place on key groups of goods. The documents also say, "Goods transited in transit to circumvent the increased duty will be subject to this increased duty." This is a scheme in which products are first shipped to a third country and then to the U.S. to formally avoid being directly subject to import duties,  CNBC clarifies.

Trump has also released similar letters to the leaders of Kazakhstan, Laos, Malaysia, Myanmar and South Africa. Their duty rates vary, ranging from 25 percent for Malaysia and Kazakhstan to 40 percent for Laos and Myanmar. But the start date for the increased fees is the same: Aug. 1. Trump will extend the pause in "retaliatory" duties for all affected countries until that day, The Wall Street Journal reported, citing White House press secretary Caroline Leavitt. The current deadline is July 9, with a 10% "retaliatory" duty rate until that date. Livitt also said that on Monday  "about 12 other countries [besides Japan and South Korea]"  will receive duty notices, with additional letters to follow in the coming days, reports Bloomberg.

The U.S. market reacted to the publication of the letters with a sharp drop. The main U.S. stock index S&P 500 was down by 1% at one point, but then slowed to about 0.8%. The tech index Nasdaq Composite was down about 1.1%, also then slowing to 0.9%. And the blue-chip index Dow Jones Industrial Average was losing over 500 points (more than 1.2%). The index of small- and mid-capitalization companies declined the most, down 1.4% Russell 2000 by 1.4%. The VIX index, known as the "Wall Street fear index," jumped 3.7%.

Investors should consider what happens if "things don't go according to plan" after July 9, when the U.S. deadline for negotiations expires, Morgan Stanley strategist Michael Zizas warned. He described three possible scenarios of events, reported CNBC.

Basic assumes the U.S. will announce progress in the talks and extend the pause in imposing duties on key partners, giving negotiators more time to reconcile differences.

"In this scenario, we expect partners such as the EU and Japan to end up staying at the current base duty level of 10 percent, although there may be indications that rates could rise in the future if certain negotiating conditions are not met," the strategist wrote on July 6.

If negotiations do not go as planned, Morgan Stanley's second scenario envisions that the U.S. could impose duties on some countries "selectively and with varying timelines" - potentially leaving time for negotiations to continue. The EU and Japan could then face tougher measures "given the complexity of bilateral negotiations and sectoral nuances," the strategist said.

In the third scenario, a Morgan Stanley strategist described an outcome in which the U.S. announces framework agreements rather than full-blown trade deals. This, he said, "would give markets the sense that expected effective U.S. tariff rates would be shifted downward, meaning short-term uncertainty about how much imports would cost would be reduced."

The introduction of previously announced high duties against all trading partners without trade agreements could be the most negative scenario, says UBS Global Wealth Management. According to one of the world's largest private wealth management banks, this will provoke a large-scale flight of investors from risks, write The Wall Street Journal. A new postponement of duties could be seen by markets as a reluctance to move to implement them, which would support risk appetite, UBS analysts added.

The U.S. has struck deals with the United Kingdom and Vietnam, and with China agreed to mutually ease trade restrictions. Major U.S. partners Japan, South Korea and the European Union are still just negotiating. 

With India, Trump hopes to reach a deal, but with Japan, it's getting harder. The US president has called Tokyo a difficult partner and this week stepped up criticism: "Japan should pay 30%, 35% or whatever we say." Japanese Prime Minister Ishiba Shigeru, for his part, announced on July 6 that Tokyo "will not make easy concessions" in the talks and will continue to demand the elimination of U.S. auto duties. Brussels is still working to reach an agreement in time for July 9, reported Reuters on Monday, citing an EU official.

South Korea last weekend sent a presidential adviser to the United States for trade talks. Seoul had hoped for an agreement that would involve eliminating or reducing duties on cars, steel and other goods, wrote Reuters.

This article was AI-translated and verified by a human editor