Tariff News Is Pouring In. The Market May Be Too Complacent.

President Donald Trump warned that tariff on Japan and South Korea could rise beyond 25% if those countries retaliate. (Joe Raedle/Getty Images)

President Donald Trump sent letters to more than a dozen trading partners, setting the tariff rates for some countries at or slightly above what was unveiled April 2, while extending the deadline for negotiations to Aug. 1 from July 9. The investor takeaway: Tariffs may end up above the 10% some in the market had baked into their assumptions.

The administration’s letters to major trading partners South Korea and Japan were set at 25%—a percentage point higher for Japan than what was announced April 2. Meanwhile, smaller Southeast Asian countries like Laos and Myanmar, which have become bigger production hot spots as trade is reshuffled, were hit with lower rates than outlined in April, though the highest levies in this batch are 40%. Countries like Tunisia, Bosnia, and Indonesia ended up near the lower end, with rates of 25% to 32%.

While the administration initially said it expected 90 deals in 90 days, only agreements with Vietnam and the United Kingdom have been announced. Treasury Secretary Scott Bessent stressed the quality of deals over quantity on Monday, adding that he expected several announcements over the next 48 hours. India is widely expected to be one of those countries.

Analysts see the latest letters as an effort to get more framework agreements signed. The 14 letters disclosed so far by the administration include some rates near levels that rattled markets when they were unveiled April 2. Nearly all were above the 10% the baseline the market has been anticipating.

“They may be willing to test the market again. Given how well the economy is performing, they understandably feel empowered to push this,” said Ryan Majerus, a partner at King & Spalding who previously worked in the Commerce Department and Office of the U.S. Trade Representative.

Trump warned countries that the tariffs would ratchet up if they retaliate. Last week, he floated the prospect of 60% to 70% tariff rates on some countries, which would put them beyond the highest levels announced April 2.

Trump also threatened an additional 10% tariff on any country that aligns itself with the “anti-American” policies of the Brics, a bloc of developing countries that includes Brazil, Russia, India, and China, as well as Saudi Arabia. The threat, reinforcing a common pushback from the administration as countries look to diversify beyond the U.S. dollar and U.S. ties. came after these countries issued a joint statement flagging the risks from the rise of unilateral tariffs.

Investors seem to be factoring in tougher times after weeks in which markets had proven resilient to geopolitical volatility. The Dow Jones Industrial Average fell by more than 400 points, or 0.9%. The S&P 500 and Nasdaq Composite fell by similar amounts.

Now that Congress has passed Trump’s tax and spending bill, some think the administration may have more political capital to push harder on its priorities to rebalance the deficit, reshore manufacturing, and address unfair trading practices. “With [the bill] done, we’re seeing ‘Tariff Man’ reappear on the scene,” said Brian McCarthy, managing principal at Macrolens, an economic consultancy. Tariffs could end considerably higher than what the markets anticipate, he warned.

Those looking for patterns in the group of countries that received letters noted that transshipments were referred to in several of the missives to Southeast Asian countries, including Thailand and Laos, likely reflecting the administration’s concerns that China is rerouting trade to evade levies on its exports. The deal with Vietnam included a 40% tariff on transshipped goods, but analyst raised questions about how this would be enforced, or even defined.

If the administration’s definition of transshipping is broader than is officially accepted, that could shake up supply chains across Southeast Asia, especially if opens the door to recalibrating rules of origin, according to Monica Gorman, managing director at Crowell Global Advisors and a former White House and Commerce Department official focused on manufacturing and trade.

Other countries that received letters, such as Myanmar and Kazakhstan, have critical minerals that have emerged as a major leverage point with China. That leaves the possibility that any agreement could include helping the U.S. shore up its access to these so-called rare earths.

Another big question is the fate of sector-oriented tariffs—those in place on autos and aluminum, plus those still looming on semiconductors, pharmaceuticals and other industries that are critical to major trading partners. The administration has said discussions around these sector-oriented tariffs, imposed on national-security grounds and implemented by the Commerce Department, are separate from those around the April 2 tariffs.

In the case of South Korea and Japan, the latest generalized 25% tariffs outlined in Monday’s letters aren’t expected to be stacked on top of the 50% levies already in place on steel, according to a White House official.

Those industry-oriented tariffs have been a point of contention in negotiations because they pertain to often-critical sectors for major trading partners, such as Japan. “For trading partners, it is very difficult, if not impossible, to negotiate a lasting deal unless [these sector-specific tariffs] are part of the discussion,” Gorman said. “There continue to be a lot of unknowns so it’s extremely unlikely to get deals where details are clear, which continues to lead to businesses unable to predict their tariff rates and costs.”

Another issue is what might emerge from any agreements that are announced this week, such as with India. Owen Tedford, a senior analyst at Beacon Policy Advisors, expects most countries that get some sort of agreement to see a pact similar to the one struck by the U.K.

That would involve continued 10% tariffs, agreements to keep talking on other fronts, and potential carve-outs for stickier areas. The U.K., for example, managed to get some cars exempted from auto tariffs. But details of agreements have been sparse, leaving markets and companies still in tariff limbo.

Write to Reshma Kapadia at reshma.kapadia@barrons.com