US: July 9 unlikely to turn into a ‘Liberation Day 2.0’
- We expect possible tariff increases on July 9 to remain smaller in scale compared to the salvo announced on April 1st 'Liberation Day'.
- US could strike preliminary deals with trading partners to buy time for more thorough negotiations. Treasury Secretary Bessent has appeared ready to postpone the deadline towards fall for countries negotiating in 'good faith'.
- Legality of country-specific 'reciprocal tariffs' and the unclear outlook for new sectoral tariffs complicate the negotiations. Stricter stance on limiting re-routing of trade could mean higher tariffs for especially SEA countries, and cause tariffs to bite harder on the American consumer.
US administration appears to be settling for mostly ‘agreements in principle’ instead of comprehensive trade deals as the 9 July deadline looms closer. Despite the earlier claims for striking 90 deals in 90 days, negotiations will likely extend into early fall.
We expect the US to maintain the 10% universal tariff rate in effect for now. Treasury Secretary Bessent reiterated that even if countries agreed to postpone the negotiation deadline, the 10% rate would not be eased. Majority of trading partners will hear their tariff rate over coming days, and for ‘about 100 countries’, it will be 10% (Reuters).
Reuters’ sources suggested EU diplomats had also accepted the baseline level as ‘unavoidable’. While Trump has not promised any extensions to talks, he has not closed the door for them either. Bessent signalled that he expects trade talks to get ‘wrapped up’ by Labor Day (1st of September), which appeared to lay ground for delays.
We do not expect the US to reimpose majority of the country-specific rates announced on April 1st next week. Some countries, where negotiations have stalled or are progressing slowly, could face temporary increases as Trump’s negotiation tactic. But as before, tariffs could again be lowered quickly when the final agreement is struck.
Case in point: Vietnam deal
The deal struck with Vietnam this week included higher tariff rates than we had originally assumed. US will charge 20% tariff on imports from Vietnam, and 40% for transhipments from other countries. According to OECD’s TiVA database, the foreign value embedded in Vietnam’s exports has climbed up to 48%. Domestic value added in exports to US specifically was only 50%, down from 73% in year 2000 (chart 1). Looking at purely Chinese value added, Vietnam also stands out from other SEA countries (Chart 2). This suggests the effective tariff rate could be as high as 30% if transshipment is defined broadly to include foreign value added embedded in exports. We suspect that challenges in monitoring transshipments and non-compliance could lead to a lower effective rate. In any case, the rate is lower than the originally threatened ‘reciprocal tariff’ (46%) but significantly above the 10% universal rate that has prevailed since early April. Politico reported that the countries would continue to work on a final deal which could still include a lower tariff rate.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
