US President Donald Trump has warned that he will put on the stop chair of the trade war by “introducing a fair and practical trade” as how it must be practiced. The announced measures, which, possibly, will be presented as early as Tuesday, may cause the wide imposition of tariff increases for Asian, African and Latin American countries such as India and set revenue-based Value Added Taxes (VATs) in the European Union, thus exacerbating the conflicts with the EU.
What Are Reciprocal Tariffs?
Reciprocal tariffs are levies on imports that are directly related to tariff rates imposed on the United States by other countries. During his campaign, Trump stated, “An eye for an eye, a tariff for a tariff, same exact amount. On Sunday, he indicated that he would provide more details about these tariffs soon, asserting that “every country will be reciprocal. One method could involve raising tariff rates on US imports to match the rates other countries apply to US goods. This would increase the US average tariff rate by about 2 percentage points.
Nevertheless, condition based reciprocal tariff calculation has involved complicate. Although the average tariff is relatively low in the United States (2.7%, higher tariffs are used (e.g., on politically sensitive fiber types, e.g., fiber apparel, sugar) as part of the complex trade policy of the US. Additionally, non-tariff barriers like regulations could further complicate the situation.
Who Will Be Affected?
EMEs with average tariffs higher than the US (e.g., India, and Thailand) may experience severe consequences from countervailing tariffs. Trump has previously indicted India as “a very big abuser” of trade and recently President Trump’s National Economic Council Director Kevin Hassett has highlighted India has been provided high tariffs which are restricting the imports. Although many less affluent countries levy high tariffs as a revenue strategy and/or protection against competitive pressure, they generally do not have the capability of imposing non-tariff barriers such as regulatory protectionism.
According to Goldman Sachs, countries that have FTAs with the US, including Mexico, Canada, and Korea, may be free from the reciprocal tariffs, particularly when the US adopts a country-based tariff policy.
What Are the Challanges?
It is unknown whether reciprocally targeted tariffs can serve as a substitute to the 10-20% flat tariff he previously suggested or as a supplementary policy. A possible complication is whether the imposition of the administration can be framed in terms of non-tariff barriers, e.g., value-added tax (VAT). In the event that happens, the effective average tariff rate may increase by an additional 10 pp, especially in response to high EU VAT rates.
Trump’s Goal
Trump’s goal may be to induce uncertainty as a bargaining chip, but that uncertainty can gobble up business functions, according to Jeffrey Schott, senior fellow at the Peterson Institute for International Economics. He commented on this lack of predictability between US companies and international companies and how important the potential negotiation goals of the US and other stakeholders are, including economic and geopolitical goals, with Ukraine in one area and US export expansion in areas like LNG another.
US Tariff Landscape
In the U.S., the country with lowest tariffs in the world is not the country, because the U.S. is ranked in the middle among developed countries. Cato Institute’s Scott Lincicome emphasized that true reciprocity under Trump’s proposed system might require the US to reduce tariffs on goods from several countries to match their average rates.