Economic Letter from Asia: The Final Countdown?

This week, we look at the latest US trade developments and their implications for Asia, as the US’ 90-day tariff pause expires on Wednesday (July 9). Market sentiment had already turned cautious ahead of the deadline, reflecting heightened uncertainty around US trade policy (chart 1). This unease was reinforced by President Trump’s announcement that tariff notices would be sent to trading partners, starting with 12 to 15 to be sent on Monday. A modest source of relief came from US Treasury Secretary Bessent, who indicated that some countries could be granted an extra three weeks to negotiate. However, any resulting tariffs are still set to take effect on August 1. Bessent also confirmed that around 100 economies will now face a baseline 10% tariff. If this is upheld—and if 10% remains the floor—it implies that more than 20 economies have lost their previous preferential treatment, further worsening their trade position (chart 2).

In contrast, Vietnam reached a deal last week, cutting its tariff rate from 46% to 20%, though the agreement includes a 40% tariff on “transshipments.” In return, the US secured tariff-free access to Vietnamese markets. While 20% is a clear improvement, it remains high relative to the current 10% reprieve and could feed through to higher US consumer prices—particularly given Vietnam’s key role in electronics exports (chart 3). Japan, meanwhile, is under pressure to open its rice market or face tariffs of up to 35%. However, any concessions would be politically sensitive, particularly with upper house elections approaching. In the meantime, Japan has already ramped up rice imports to help ease domestic shortages (chart 4). All this comes as central banks in Australia, New Zealand, South Korea, and Malaysia meet this week. The Reserve Bank of Australia is widely expected to cut rates amid easing inflation to further support growth (chart 5), while South Korea’s central bank is seen likely to hold steady, wary of rising home prices and mortgage growth (chart 6).

Latest US tariff developments Market sentiment turned cautious late last week as the US’ tariff pause neared its end. Understandably, this unease was reinforced by President Trump’s announcement that tariff notices would be sent to trading partners, starting with 12 to 15 to be sent on Monday. The earlier sense of relief—when tariffs appeared to have been delayed—has faded, giving way to renewed uncertainty. As this shift in sentiment takes hold, equity performance across advanced Asia has weakened in recent days, as shown in chart 1. Amid the resurfacing uncertainty, there is a modest point of reprieve. While this Wednesday (July 9) marks the end of the US' 90-day tariff pause, US Treasury Secretary Scott Bessent has indicated that some countries may be granted an additional three weeks to continue negotiations. Furthermore, any new resulting tariff rates will only take effect on August 1. The extension offers more time to talk—but not a delay in implementation. That said, progress on trade discussions with the US has been limited for most Asian economies—and may even have deteriorated for some, such as Japan, which will be addressed in a later section.

Digging deeper into the details, Bessent also noted that around 100 economies and territories will now face a baseline tariff of 10%. If this is accurate—and if the 10% rate remains the floor—it suggests that many of the economies and territories originally assigned that baseline rate, roughly 20 or more, have now been excluded. In effect, their relative position has worsened. In the Asia-Pacific region, key economies to watch in this context include Australia, New Zealand, and Singapore, among others, as shown on chart 2. Notably, these countries have not been actively engaged in substantive trade negotiations with the US—perhaps understandably so. Furthermore, based on recent messaging from the US, it appears that the original “Liberation Day” tariff schedule may no longer apply. This raises a broader and more consequential question: Will the new rates be grounded in a clear justification or mechanism—and if so, what might that be?

Vietnam While trade deals with the US have been few and far between since the beginning of the tariff pause, Vietnam has stood out following the announcement of a new trade agreement with the US late last week. Originally facing a reciprocal tariff rate of 46%, Vietnam has reached a deal to reduce that rate to 20%. However, the agreement also includes a 40% tariff on so-called “transshipments”—a measure aimed at addressing US concerns that goods may be routed through Vietnam from other economies, possibly China, to circumvent higher tariffs or trade restrictions. In return, the US has secured tariff-free access to Vietnamese markets. While the 20% rate is a significant improvement over the initially proposed 46%, it remains relatively high—especially compared to the 10% reprieve level. This will likely translate into higher costs for American consumers unless the increase is absorbed by producers or suppliers. On the positive side, tariff-free access to Vietnam offers some offset, particularly for US input goods sent to Vietnam for further processing, which would avoid additional tariffs on that leg of trade. That said, there is still uncertainty around how the “transshipment” clause will be defined and enforced in practice. Given Vietnam’s role as a major supplier of electronics—including smartphones—to the US (chart 3), the increase from the 10% pause rate to 20% is significant. If the added costs are passed through the supply chain, it could lead to a noticeable impact on US consumer prices.

Japan Turning to Japan, the country is walking a tightrope between avoiding the economic fallout of renewed US tariffs and being seen as capitulating to US trade demands. Among those demands is a push for Japan to open up its market further—particularly for US rice. President Trump has criticized Japan as being “spoiled” for resisting such moves and has threatened tariffs of 30–35%, significantly higher than the 24% “Liberation Day” rate. Complying with US demands could be politically costly for the Japanese government. Any concession on rice would likely be viewed as a blow to Japanese farmers—a key part of Prime Minister Ishiba’s political base. The issue is especially sensitive with upper house elections approaching. At the same time, Japan is grappling with a domestic rice shortage that has been driving prices higher. Given rice’s central role in the Japanese diet, the shortage is a major cost-of-living concern. In response, Japan has already ramped up rice imports, as shown in chart 4, including by bringing forward a tariff-free tender—originally scheduled for September—for 30,000 tons from the US, Australia, and Thailand. However, relative to Japan’s actual consumption needs, this incremental supply is just a drop in the bucket.

Central bank decisions this week This week’s renewed US trade uncertainty threatens to complicate a series of central bank decisions across the region. The central banks of Australia, New Zealand, South Korea, and Malaysia are all set to announce policy rate decisions just as the US’ 90-day tariff pause expires. If the so-called “Liberation Day” tariffs are reinstated, they could pose fresh downside risks to regional trade and growth, forcing policymakers to reassess their outlooks. Some central banks already have a clear easing bias. For example, the Reserve Bank of Australia is widely expected to cut rates this week—its third cut in the current cycle—as inflation continues to moderate (chart 5) and domestic growth remains sluggish.

Lastly, turning to South Korea, the central bank (BoK) has already lowered rates four times since beginning its easing cycle last October and maintained a dovish tone at its most recent meeting in response to weakening growth momentum. However, the BoK is widely expected to hold rates steady this week. It is aiming to strike a balance between supporting growth—particularly with the potential reinstatement of US tariffs looming—and avoiding overheating in segments of the domestic economy. In particular, the BoK remains concerned about the property market, where housing prices have resumed their upward trend, and the household loan sector—especially mortgage lending—where loan growth has once again accelerated, as shown in chart 6.