On July 7 (ET), former President Trump sent letters to Japan, South Korea, and 12 other countries announcing tariff increases that will take effect on August 1. The new tariff rates are largely in line with the reciprocal tariffs announced in early April. For now, markets have opted for “rational disregard,” waiting for further data to confirm the impact.
Current Status of U.S. Tariff Implementation: Trump Delays Tariff Suspension Deadline, May Issue Letters in Batches
As of May, the average U.S. tariff rate stood at 7.4%, with the pace of implementation slower than initially expected. Latest figures show the tariff rate on Chinese goods is 38.6%, Japan 9.3%, the UK 6.2%, Vietnam 4.8%, and Germany 6%. Among major product categories, the import tariff on automobiles is 13.4%, steel products 29.5%, aluminum 23%, plastics 11.3%, and electrical equipment 8.3%.
On July 7, the U.S. announced it would raise tariffs on 14 countries, with the effective date postponed to August 1. The initial reciprocal tariffs announced on April 2 triggered a stronger-than-expected market reaction, prompting Trump on April 9 to temporarily suspend them for 90 days and instead implement only a baseline 10% tariff. Now, by setting the effective date at August 1, Trump appears to be leveraging the delay to pressure negotiating partners.
Trump may also opt to issue tariff letters in batches, allowing targeted pressure and layered tariff rates to increase negotiation efficiency. On July 3, Trump stated that negotiating individually with so many countries was too complex, and that he would instead negotiate in groups with uniform tariff levels. This effectively returns to a framework of “discriminatory tariffs.” The final rates will likely depend on the size of each country’s trade surplus with the U.S. (the basis for reciprocal tariffs) and the concessions agreed during negotiations.
Negotiation Progress: U.S.–Japan Stalled, U.S.–EU Pursues Partial Deal, U.S.–Mexico Near Agreement
Negotiations between the U.S. and EU have shifted focus to reaching only a limited framework agreement. The EU has agreed to maintain a 10% baseline tariff but demands lower tariffs on aircraft, pharmaceuticals, and steel/aluminum, while the U.S. insists on keeping a 25% automotive tariff and expanding agricultural exports to Europe. The EU has announced a €21 billion retaliatory tariff package that may take effect on July 14 if no deal is reached.
U.S.–Japan talks remain deadlocked, with neither side willing to compromise on issues such as automobiles and rice. Seven rounds of negotiations have been held so far. Japan wants the 25% automotive tariff removed and baseline tariffs reduced, while the U.S. refuses to make concessions on cars and seeks more agricultural access. On July 1, Trump publicly cast doubt on whether a deal could be reached with Japan, warning that if talks fail, a 25% tariff will be imposed.
By contrast, the U.S. and Mexico are close to an agreement. Both sides are near finalizing a framework to lift steel and aluminum tariffs, with Mexico pushing for an early review of the USMCA, while the U.S. demands that Mexico increase purchases of American cars and auto parts. The deadline for talks with Canada has been pushed back multiple times but is now set for July 21, with Canada still seeking tariff reductions.
Possible Endgame for Tariffs 2.0: Reciprocal Tariffs Remain Discriminatory, Final Rates May Converge to April 2 Levels
Trump aims to use tariffs to achieve three key goals: industrial protection (revitalizing manufacturing), addressing the twin deficits, and leveraging foreign policy. However, these objectives can conflict—for example, industrial protection and foreign policy leverage may require high tariffs, but higher rates could reduce tariff revenue. Thus, the U.S. may expand the scope of a baseline tariff to mitigate the deficit issue while imposing higher rates on select sectors to promote reshoring and protect key industries.
In essence, reciprocal tariffs are discriminatory tariffs, with the size of a country’s trade surplus being the main factor for the “baseline” rate. Treasury Secretary Bessent has suggested grouping U.S. trade partners and imposing different tariffs by group. The trade surplus remains the main grouping criterion: about 100 countries with small U.S. trade surpluses would face a 10% tariff, covering roughly 5% of the total U.S. trade deficit, while 18 countries that fail to reach agreements could face tariffs ranging from 20% to 70%, accounting for 95% of the deficit.
If all tariffs come into force on August 1, the simple average tariff rate on these 14 countries will rise to 29%, just 4 percentage points lower than the initial April 2 reciprocal tariff level of 33%. This means the economic impact of the tariffs should not be underestimated. The June non-farm payroll report temporarily eased market concerns about an unexpectedly sharp economic slowdown, but structurally, the data does not disprove signs that the U.S. economic cycle is cooling. In the second half of the year, it will be critical to monitor how tariffs play out in the data—particularly any rise in unemployment to the 4.4%–4.6% range, which could amplify market disruptions.