The Philippines and Japan Trade Deals Put the Pressure on South Korea and the Rest of EM to Secure One

The message is loud and clear – Trump tariffs are here for everyone, and not just China. An important ally like Japan got handed a 15% rate for reciprocal tariff with a key sectoral reprieve of 15% versus 25%. While tariffs are lower than reciprocal tariff day, except for the Philippines which got 19%, a two percentage higher than the 17% announced in April. Putting together the latest deals (Japan and the Philippines), it becomes increasingly clear that 10% is the new zero and economies are conceding to a higher but still manageable tariff level to secure market access to the US.So far, other than the China truce, we have had four trade deals in Asia, with Japan having the lowest tariff rate of 15% and significant reprieve for its auto sector at 15% versus 25% without caps. As the auto sector is key, it is considered a win for Japan even at a higher level. For Southeast Asia, Indonesia and the Philippines settling at 19% sets a high bar for others such as Thailand and Malaysia. And that means it is very likely that a Japan-like deal is the best case scenario for countries with significant trade surpluses with the US and a win on sectoral tariff is possible.South Korea has yet to have a deal but will likely be pushed to cement one given that Japanese autos now have a better rate than Korean ones. The peninsula even has a larger auto exposure to the US as a share of GDP. Securing a reprieve for auto tariff would be key for South Korea as well as lowering the rate. How low can it expect? Japan provides a benchmark and it would be difficult to secure a better deal than a 10% floor rate.The upshot? The deals show that the US needs trade partners and it is still profitable for Asian exporters to sell to the US at the current level. That means further investment and trade are likely. But Asian economies will have to also accept a new reality – and that the US is much more transactional in providing trade access. It asks countries to buy more strategic US goods, from planes to defense. And that comes at the expense of competitors to US products. Moreover, this will likely move to other realms beyond economics, such as security where more is being asked from allies, which means that higher spending on defense is vital.In other words, we live in a new normal where ten percent tariff is the new zero. And settling close to that level is considered a “good” deal and gives space for Asian traders to be competitive. But in this new normal, the stakes are higher as there is no more free trade.