Trump's tariff letters arrive

Formal tariff letters from the White House reached Tokyo and Seoul on 7 July, and the diplomatic niceties went out of the window with them. The terms were blunt. Japan and South Korea will pay a 25 per cent tariff on everything they ship to the United States unless they sign bilateral trade concessions within fourteen calendar days.

How the deadline arrived

The letters are the end of a process that began on 2 April, when the president announced a 10 per cent baseline tariff on almost all imports and higher reciprocal rates for dozens of countries. A week later, with the Treasury market wobbling, most of the higher rates were suspended for 90 days so that governments could negotiate. That pause was due to lapse on 9 July. Japan and Korea spent the interval sending ministers to Washington and came home with nothing signed.

The rate itself is no great surprise. Japan was assigned 24 per cent and Korea 25 per cent in April, so the letters mostly confirm numbers already on the table. What has changed is the delivery: a form letter, posted on the president's social-media account, addressed to governments that host tens of thousands of American troops.

Allies get the same letter

Both countries are close security allies of America, and the letters make plain that this buys them nothing on trade. Korea's chip and battery conglomerates and Japan's big carmakers now face the loss of their most profitable export routes. The notices are meant to rattle allied governments into skipping the multilateral forums and signing up to bilateral quotas, and to do so in a hurry.

For the carmakers the letters come on top of damage already done. Since April imported cars have faced a separate 25 per cent duty under Section 232 of the Trade Expansion Act, and steel and aluminium now carry 50 per cent. Toyota, Honda, Hyundai and Kia have spent the spring deciding how much of that to absorb and how much to push on to dealers. A broad levy on machinery, electronics and parts would reach even the components their American plants import.

Korea's position is awkward for a particular reason. Its free-trade agreement with America, in force since 2012, was supposed to have removed most tariffs between the two economies, and a 25 per cent levy treats that treaty as a dead letter. Seoul also has a new president, Lee Jae-myung, elected in early June, whose team has had barely a month to prepare for talks of this kind.

Politics in Tokyo

Japan faces an upper-house election on 20 July, six days before the fourteen days run out. Shigeru Ishiba's coalition lost its lower-house majority last October, and he has little room to be seen giving ground on rice or cars before polling day. Farm protection is popular with the rural voters his party depends on. Any offer Tokyo makes before the vote is therefore likely to be framed as investment in America rather than as opening Japanese markets.

Two weeks is not long

The first practical effect is that transpacific purchasing has frozen. Asian suppliers cannot swallow a 25 per cent hit to their margins without closing assembly lines. American technology and car companies, for their part, cannot find substitutes for specialised Japanese machine tools or Korean memory modules at a fortnight's notice.

The duty is paid in the first instance by the American importer of record when goods clear customs. How the burden is then divided depends on haggling: a Japanese supplier may trim its invoice price, the American buyer may accept a thinner margin, and the final customer picks up the rest. None of that can be renegotiated in two weeks, so buyers are holding orders back until they know the rate.

Who gains from the squeeze

The winners are few and mostly nearby. Goods from Mexico and Canada that meet the rules of the USMCA trade pact have been spared the broad levies, which makes plants in those countries relatively more attractive to carmakers deciding where to build for American buyers. American makers of memory chips and machine tools gain some pricing power at home, though not the capacity to replace Asian output quickly. Rival exporters in Europe and South-East Asia face letters of their own, so any advantage they gain is likely to be brief.

What the 1980s taught

America has squeezed Japan this way before. In 1981 Tokyo accepted so-called voluntary limits on car exports, and in 1986 it signed a semiconductor agreement that put floor prices under its chips. Both deals worked in the narrow sense that Japanese firms shipped less. Both also pushed Japanese carmakers to build factories in America, raised prices for American buyers and handed Japanese producers fat margins on the smaller volume. Managed trade tends to reward the incumbents it is aimed at, which is worth remembering if quotas are what Washington is after.

The case for calling a bluff

The strongest counterargument is that the letters are a negotiating tactic, and this White House has a record of retreating. The April rates were suspended within a week, and the 145 per cent levy on Chinese goods was cut to 30 per cent after talks in Geneva in May. On that reading Tokyo and Seoul should sit tight, since deadlines set in Washington have a habit of slipping. The trouble is that even the retreats have left a 10 per cent floor under almost everything, and the car and steel duties have not moved. Waiting has not been free.

Three things would change the call. A signed framework with either country, however thin, would show that the letters work as leverage and would probably bring the rate down. An exemption for parts used in American factories would ease the pressure on carmakers. And a renewed jump in Treasury yields, which helped prompt the April pause, would give the administration a reason to soften again.

The letters turn trade diplomacy into something close to a protection racket, and within two weeks Tokyo and Seoul will probably have to choose between conceding on quotas and losing much of their access to the American market. The likelier choice is concession, dressed up as investment pledges and purchases of American goods, and Japanese and Korean exporters will still end the summer paying a markedly higher rate than they did a year ago.