Both countries are expected to reach a packaged deal encompassing tariffs, non-tariff barriers, and defense expenditures. With different domestic political situations, South Korea is likely to prefer to strike a deal via a high-level summit while Japan will continue with its working-level negotiations.
Also, given that Vietnam’s trade deficit with the US (around US$130 billion) was almost double that of South Korea (US$70 billion) and Japan (US$72 billion), we believe that both countries will try to reach for a lower rate than Vietnam, emphasising their strategic importance in the region. We believe that both countries can lower the reciprocal tariffs to near 10% and try to negotiate sectoral tariffs – 25% on autos and 50% on steel. But the US won’t make a concession on sectoral tariffs. Japan was initially considered as a potential first mover for a quick deal, but the significant differences between the two parties regarding car tariffs remains unresolved. We think the US-UK deal can be a reference to both countries, so that they can secure a quota for lower tariffs, but it is difficult to avoid the higher tax rate entirely.
Both countries made significant efforts to increase their direct investment in the US – Hyundai and Posco’s auto and steel production & Nippon Steel and SoftBank’s investment in steel and AI technology. But the key should be reducing its trade surplus to the US and thus both countries are likely to import more US goods – energy and agricultural products. South Korea is likely to leverage its negotiations on increases in direct investment in shipbuilding in the US. Japan will highlight it being the largest FDI country to the US.