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US President Donald Trump on Monday unveiled the first batch of letters that threaten new “reciprocal” tariffs on the nation’s trading partners, charging 25% levies on imports from Japan and South Korea, and 25-40% on goods from another 12 countries including smaller Asian economies and South Africa. Trump warned that any retaliatory tariffs will trigger like-for-like US tariffs on top of the threatened rate. The S&P 500 fell the most in three weeks, and the US dollar rose. White House Press Secretary Karoline Leavitt said more letters will be sent out in the coming days.

However, Trump also signed an executive order on Monday extending the pause of the “reciprocal” tariffs to 1 August, allowing more time for trade negotiations. He added that the new deadline was “not 100% firm” and that the US remains open to further talks with countries offering additional concessions. Investor sentiment stabilized on Tuesday ahead of the US market open, with both Japan's Nikkei 225 and South Korea's Kospi posting gains, and S&P 500 futures flat. Asian currencies have also clawed back early losses.

We continue to expect various sector-specific tariffs to follow, including levies targeting semiconductors, pharmaceuticals, copper, lumber, and critical minerals, and there remains significant uncertainty over the scope and shape of these Section 232 tariffs. Market volatility is likely to pick up, but the latest development does not constitute an escalation in the trade war, in our view.

The letters have been well publicized, and the tariffs remain around the same levels announced in April. The renewed threat that "reciprocal" tariffs could again rise higher toward the 2 April levels suggests that far fewer bilateral agreements are materializing than the Trump administration had hoped for at this stage. So far, the White House has signed just three handshake deals, well short of prior suggestions that 90 deals could be completed in 90 days. The fact that new sectoral tariffs might be imposed on countries even after an agreement is reached is likely part of the reason negotiations remain challenging. Given Trump’s escalate-to-de-escalate negotiating approach, the US administration may be looking to gain additional leverage in talks with these latest numbers. However, the move did not come as a surprise, with Trump reiterating his intention multiple times in the past several weeks. The new tariff rates are also similar to the levels announced in early April, suggesting that the administration’s purpose is not to re-escalate trade tensions.

More deals are likely to emerge amid ongoing negotiations. With Trump leaving the door open for additional negotiations and a new deadline, we continue to expect country-specific deals and arrangements in the coming weeks. These could include a baseline tariff and selective quotas or exemptions from sectoral tariffs in exchange for purchase commitments or US investment pledges. It is worth noting that the impact of “reciprocal” tariffs can be less than the announced headline rate after taking the carveouts into consideration. Additionally, notable trading partners like the EU and India did not receive a letter this round, suggesting that some deals could be in the making. Reuters reported that the EU is close to an agreement with the US that may include concessions on aircraft, medical equipment, and alcohol, while Trump indicated he US could soon make a deal with India. Treasury Secretary Scott Bessent also said over the weekend that several deals are close.

The economic costs will rise if tariffs stay elevated for a longer period. While the US administration may choose to pursue elevated tariffs for more leverage, a prolonged period of higher levies would likely increase economic costs and could bring political consequences for both Trump and the Republican Party ahead of the midterm elections next year. With the One Big Beautiful Bill Act (OBBBA) estimated to add USD 4.1tr to the US deficit over the next decade, we think trade policies or threats that risk a recession will ultimately be negotiated lower. Tariff revenues are needed to help offset spending provisions in the OBBBA, but excessively high tariffs could reduce trade, growth, and tax revenues.

So, while tariffs will likely remain high—compared with levels at the start of the year—as will the headline risk, we think the US effective tariff rate should end the year at around 15%. This would be a headwind to growth but not enough to trigger a recession given the resilience of the US consumer and the adaptability of global supply chains. We continue to recommend phasing into global equities or diversified portfolios to navigate volatility ahead.