Commentary: Liberation Day 2.0 – Weighing options

As we approach Liberation Day 2.0 deadline, one is none the wiser. The 90-day reprieve saw a tentative stabilisation in sentiments, weakened the US dollar, perked global financial markets and delayed a knock-on impact on the real economies. There has been a constant trickle of on-again off-again trade deal discussions and counter-tariff announcements. Trading partners have endured a busy few weeks of travelling the Asia-Washington corridor, seeking relief from tariffs, including sector specific rates, offering import concessions in return. Over the weekend, US Commerce Secretary Lutnick said that US tariff rates might be set this week, but will come into effect on 1 August.  

Three trade deals have been concluded (at the time of writing), with the UK, China and Vietnam. What were the telling parts of these deals?

Firstly, a baseline tariff rate stays, ranging from 10% to 30%. Details on the exact concessions and product-wise relaxations are scant, beyond few key talking points.

Secondly, an implicit acknowledgement that partners will buy more from the US has been built in, aimed at reducing the trade gap and addressing few non-trade measures.

Next, efforts have been made to rein in transshipment flows, likely targeted at China’s move to channel trade through the region to tap the tariff differential (for instance, 40% levy on any goods deemed to be transhipped through Vietnam) evident in the recent months (see chart). We also note that regional countries have initiated counteraction on their end, for instance India tightening rules of origin documentation and Vietnam creating a central agency to issue and verify origin documents.

Add to this, calls to be tolerant of currency appreciation by the region vs the US dollar was presumably also in the mix, even if not explicitly mentioned. Lastly, assurances of an increase in investments into the US.

Where to from here? In addition to being a risk mitigation exercise, which way the tariff announcements go will have material impact on markets and economies. We draw up scenarios for Liberation Day 2.0 (changes to take effect in August).

• April redux (35%) - this scenario assumes that the US administration reinstates the reciprocal tariffs with the rate determined by level of perceived cooperation in trade deals by partners. Few of the 10-15 countries with whom discussions are nearing the final leg might get temporary reprieve. Impact: Unless details are readily available, this might sow confusion, and hurt confidence.
• Summer discount (25%) – Preset reduction of the reciprocal rates (for instance, half) announced back in April, with the baseline minimum rate of 10%. Washington may continue to negotiate with countries in the coming weeks, which might could see further finetuning of the bilateral rates. Impact: This will keep markets’ ears close to the ground but not be viewed as an outright negative.
• Kick the can (probability assigned 20%) – an extension of 30-90 days citing the long list of countries that are still in wait to finalise details and concessions for the US (1 Aug kick-in reflects this). Impact: Status quo for markets and economic outlook.
• Sector-specific action (15%) – this assumes a continuation of the current 10% baseline on most of the countries and higher 30% on China, while focusing more on sector specific moves, which the US might deem sensitive, strategic or technologies that can be put to dual-use. Action on semiconductors, electronics, and pharmaceuticals, which were left out of the tariff umbrella might be considered. Action on auto, steel and aluminium are bound to continue. Impact: Part relief as a sharp increase in tariff rates are allayed, but countries with exposure to these specific sectors will be impacted. For instance, Asian countries are key suppliers of semiconductors to the US, with Malaysia leading the pack, followed by Taiwan, Vietnam, and South Korea.
• Reconciliation (5%) – this would be the most optimistic but least probable scenario where the US government strikes a conciliatory tone and counts on bilateral trade deals to gradually improve its trade balance.

After a roller coaster ride in wake of the April’s Liberation Day, equities have since recovered, notwithstanding an escalation in Middle east tensions, US fiscal concerns, and tariff uncertainty, in the interim. S&P 500 is near a fresh high, while regional bond/equity markets have attracted diversification inflows. Much of the complacency is evident in options markets, signalling traders are not betting on a significant shake up post Liberation Day 2.0.

Adopting a cautious but non-recessionary stance, DBS US economist has maintained the GDP forecast at 1.5% YoY, along with a 50bp cut from the US Fed in 2H25 and another 50bp cut in 2026. DBS currency strategist maintains that while the USD retains its structural advantages, there are early signs of erosion that leads to a slow and steady decline in its global dominance. For Asia, these scenarios (barring the most optimistic option) are likely to impact regional and trade outlook, with some concern already baked into a stronger first half of exports on frontloading, setting the stage for a weak 2H25. No easy choices here.    


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