Tariff Deadline Looms: US Threatens 70% Rates, Market Braces for Volatility

As the July 9 deadline for the "reciprocal tariffs" approaches, market expectations remain unchanged, with analysts at Morgan Stanley warning of several potential scenarios. These include a delay in negotiations, selective imposition of tariffs, or reaching a partial framework agreement to reduce tariffs. The firm cautioned that any deviation from these expectations could exacerbate economic risks.

The market is currently anticipating that the tariff suspension measures will continue for countries still in negotiations, suggesting that the July 9 deadline may not be a significant event. This expectation is based on the ongoing discussions and the potential for progress in the negotiations. However, if the outcome on July 9 differs from these expectations, it could lead to increased market volatility and economic uncertainty.

One of the key factors influencing the market's expectations is the progress in negotiations between the United States and its trading partners. The United States has been engaged in discussions with various countries to reach agreements on tariffs and trade policies. These negotiations have been ongoing, and any breakthroughs or setbacks could impact the market's outlook.

In the most likely scenario, the White House could extend the suspension period for most major trading partners, citing progress in bilateral talks. This would allow for continued negotiations and potentially higher tariffs in the future. In this case, countries like the European Union and Japan might maintain their current 10% benchmark tax rates, with the possibility of future increases if certain negotiation conditions are not met.

If negotiations stall or fail, the United States might opt for a tactical escalation by selectively reimposing tariffs with staggered implementation timelines. This could mean that countries like the European Union and Japan face stricter conditions, with tariff increases announced but delayed to allow for potential solutions. This scenario also suggests that no bilateral or regional framework agreements are likely before July 9.

In a more moderate scenario, the United States could announce a series of regional or bilateral framework agreements, providing clear signals that effective tariff rates are trending downward. This would reduce near-term uncertainty about import costs, even if these agreements are not comprehensive trade deals.

Morgan Stanley emphasized that the variability of the outcome makes tariffs a key variable in their market outlook. A more aggressive tariff path would reinforce the firm's economists' view that downside risks are increasing. This is reflected in their prediction of approximately 1% GDP growth for the fourth quarter of 2025/2026, which, while not indicative of a recession, is weaker than the previous year.

As the deadline for the "reciprocal tariffs" suspension approaches, the United States government has indicated that it will notify relevant countries and regions that trade penalties will be enforced unless new trade agreements are reached. This notification is expected to be sent out shortly before the deadline, with new tariff rates ranging from 10% to 70% and set to take effect from August 1. This upper limit of 70% is significantly higher than the previously announced 50%, raising concerns about increased inflation risks and potential asset sell-offs.

The United States has already sent letters to approximately 12 countries, outlining the new tariff rates and giving them a "take it or leave it" ultimatum. Only a few countries have managed to reach agreements with the United States so far. For example, the United Kingdom maintained a 10% base tax rate and received exemptions in key areas like automobiles, while Vietnam successfully reduced tariffs on some of its goods from the initially threatened 46% to 20%.