Tariffs, Tensions, and Trouble Ahead: How Trump’s Trade War Could Tip Japan and South Korea into Recession
As President Donald Trump sharpens his trade agenda in this election year, two of America’s closest Asian allies—Japan and South Korea—find themselves squarely in the crosshairs.
On July 7, a letter signed by Trump was revealed during a White House press briefing. The message was blunt: starting August 1, the U.S. will impose a 25% tariff on selected imports from both countries. While South Korea had already braced for this since April, Japan’s rate was nudged up by one percentage point, signaling a hardening stance from Washington.
For Japan and South Korea, both of which are already struggling with economic slowdowns, this couldn’t come at a worse time. Both nations saw their GDP shrink in the first quarter of 2025. If the trend continues, Japan is likely to fall into a technical recession—defined as two consecutive quarters of contraction.
This is particularly alarming for two economies that are deeply export-reliant. According to World Bank data, exports—including services—accounted for nearly 22% of Japan’s GDP in 2023, and a whopping 44% of South Korea’s.
Autos and auto parts are at the center of the storm. Currently, U.S. tariffs on these goods stand at 25%, while steel and aluminum imports face a 50% levy. Japan’s carmakers—Toyota, Honda, Nissan—are household names in American suburbs. Take, for example, Mark Stevens, a software engineer in San Francisco, who proudly drives a Prius and jokingly refers to it as “my most reliable colleague.” But now, that reliability might come at a higher price.
South Korea, for its part, was the fourth-largest exporter of steel to the U.S. in 2024. The tariff hike threatens one of its key trade pillars.
Japanese Prime Minister Shigeru Ishiba has emphasized that Tokyo is seeking a deal that benefits both sides—without compromising Japan’s national interest. He was clear back in May: any deal that fails to scrap the auto tariffs is off the table. In a political climate where economic anxiety is mounting, domestic tolerance for concessions is low.
Oxford Economics estimates that the new tariffs will shave 0.1 percentage point off Japan’s GDP by the end of 2026. While that may sound minimal, Norihiro Yamaguchi, Lead Japan Economist at the firm, warns that the impact is more serious than the figure suggests. “We’re dealing with an economy already suffering from high tariffs, weak consumption, and persistent uncertainty in global trade policy,” he told CNBC. Japan, he adds, will “barely grow” in late 2025 and early 2026—if it doesn’t shrink outright.
The mood is no brighter in Seoul. South Korea’s central bank slashed its 2025 growth forecast in May from 1.5% to 0.8%, citing weakening exports and a sluggish recovery in domestic demand. The broader public is beginning to feel the pinch. In Gangnam, 29-year-old Emily Lee—an office worker who recently bought her first apartment—is now rethinking her plan to trade in her old sedan for a new Hyundai SUV. “Everything feels more expensive, and less certain,” she says.
Meanwhile, Trump hinted at a possible reprieve: if Japan and South Korea open their “heretofore closed” markets, he might “perhaps, consider an adjustment” to the tariffs. That’s classic Trump—tightening the screws while leaving just enough wiggle room for a dramatic negotiation turnaround.
Markets, for now, are not panicking. HSBC’s Chief Asia Economist, Frederic Neumann, says Trump’s letter may simply function as a three-week countdown clock for a potential deal. “Investors are still hopeful that negotiations might dilute or reverse the proposed tariffs,” he noted.
But beneath the surface, uncertainty is growing. For manufacturers with global supply chains, this back-and-forth throws a wrench into everything—from pricing models to sourcing strategies. And as Mizuho Securities’ Vishnu Varathan points out, Washington is clearly frustrated with Japan’s insistence on a more principled and comprehensive approach to negotiations. Even if South Korea hasn’t drawn the same public ire, he believes it’s likely facing similar friction points.
Both countries are struggling with tepid consumer demand and limited room for domestic stimulus. If a breakthrough isn’t reached soon, these tariffs could tip the scale toward prolonged stagnation.
Trump’s trade strategy is about more than numbers—it’s about leverage. But whether this brinkmanship will yield long-term gains for the U.S. remains uncertain. As Nobel laureate Paul Krugman once wrote, “Trade policy isn’t a wrestling match. It’s a chess game that lasts for years.”
In the next few weeks, the world will be watching to see who blinks first. Behind the scenes, millions of everyday decisions—from Mark’s car upgrades to Emily’s monthly budgeting—are already being quietly recalibrated.