WASHINGTON, DC – JULY 7: An aide picks up a page from a letter to Japan and South Korea, signed by U.S. President Donald Trump, announcing 25% tariffs beginning on August 1st, during the daily press briefing in the Brady Press Briefing Room at the White House on July 7, 2025 in Washington, DC.
Andrew Harnik | Getty Images News | Getty Images
In the first batch of “tariff letters” sent to trading partners, U.S. President Donald Trump took aim at two of the closest U.S. allies in Asia: Japan and South Korea — both are already bearing the brunt of the existing duties on auto and steel exports.
Additional tariffs would further hurt these two exports-dependent economies that are grappling with a slowdown in growth, with Japan likely staring at a technical recession, or two straight quarters of economic contraction.
Both Japan and South Korea saw first-quarter gross domestic product contract on a quarter-on-quarter basis.
While South Korean imports to the U.S. face 25% tariffs, the same as Trump promised in April, the rate on Japan has been raised by 1 percentage point to 25%.
Exports — including services — made up almost 22% of Japan’s GDP in 2023, according to the latest data from the World Bank, and 44% of South Korea’s GDP in 2023.
Currently, imports of automobiles and auto parts to the U.S. incur a 25% tariff, while steel and aluminum attract a 50% levy on most countries.
Automobiles are Japan’s largest exports to the U.S. and are also among South Korea’s top exports. South Korea was also the fourth-largest exporter of steel to the U.S. in 2024, according to the International Trade Administration under the U.S. Commerce Department.
Japan’s Prime Minister Shigeru Ishiba reportedly said the country “actively seeks the chance of an agreement that benefits both countries, while protecting Japan’s national interest.” In May, Ishiba said that his country will not accept a deal that does not see the removal of auto tariffs.
The newly announced tariffs will lower Japan’s GDP by 0.1 percentage point by end-2026, according to Norihiro Yamaguchi, Lead Japan Economist at Oxford Economics.
“Given that the economy is already suffering from high tariffs on auto and elevated global trade policy uncertainly, and also weak consumption, the impact shouldn’t be dismissed,” he told CNBC
Yamaguchi said that Japan’s economy will “barely grow” in the second half of 2025 and in the first half of 2026, if not falling into a recession.
The U.S. is Japan’s largest export market, with 21.3 trillion yen ($145.76 billion) of shipments to the country in 2024, while South Korea exported goods worth $127.8 billion to the U.S. in the same year, and counts the U.S. as its second-largest export market.
Reflecting a “more intensified tariff policy stance,” the Bank of Korea in May nearly halved GDP growth estimates for 2025 to 0.8% from February’s projection of 1.5%.
“The recovery in domestic demand has been delayed, while export growth is expected to slow further due to the impact of U.S. tariffs,” the BOK said.
Frederic Neumann, Chief Asia Economist at HSBC told CNBC that should Japan and South Korea fail to reach a deal, these tariffs will pose “considerable headwinds to growth.”
Both Japan and South Korea are already facing sluggish domestic demand.
Offering a silver lining, Trump said that he was willing to “perhaps, consider an adjustment to this letter” if the countries were to open their “heretofore closed” markets to the U.S.
Pressure tactics are being brought to bear on South Korea and Japan, said Vishnu Varathan, managing director at Mizuho Securities.
“The frustration with Japan’s more principled and holistic approach (covering sectoral tariffs) stalling a deal being a source of frustration for U.S. trade negotiators, and crucially for Trump, speaks for itself.” he added.
While Trump has not publicly expressed anger toward South Korea, Varathan said “it is not unimaginable that there are sticking points similar to Japan’s, thereby invoking the letter.”
Markets, meanwhile, appear to be shrugging of the tariff threats — for now. HSBC’s Neumann said that Trump’s letters essentially amounts to a deadline extension for tariff negotiations by three weeks.
“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,” he said.