President Trump is set to implement reciprocal tariffs, a move he claims will restore American “greatness.” This strategy, based on the principle of equal taxation, may provoke global trade tensions and affect economies with existing high tariffs. While emerging markets typically have higher tariffs, the U.S. currently has a higher average than Europe. The goal seems to create uncertainty as a negotiation tactic, potentially leveraging tariffs to gain concessions from other nations.
The trade war is entering a new chapter, as President Donald Trump announced his intention to introduce reciprocal tariffs. On Thursday, he proclaimed, “Three great weeks, perhaps the best of all time, but today is the biggest: reciprocal tariffs!!”, reiterating his commitment to restore America’s “greatness.”
This ongoing threat from the Oval Office is likely to provoke significant responses worldwide, potentially destabilizing global trade. Such a move raises concerns among international authorities and could severely impact economies that have already implemented high tariffs. But what exactly are reciprocal tariffs, and how do they function?
Understanding “Reciprocal Tariffs”
The concept of reciprocal tariffs isn’t novel for Trump, who previously hinted at this during his campaign. He has framed it as, “An eye for an eye, a tariff for a tariff, exactly the same amount.” He succinctly expressed this notion on Sunday: “If they charge us, we charge them.” From his perspective, it is unjust for foreign nations to levy higher taxes on American goods compared to what American products incur when entering their markets.
White House economic advisor Kevin Hassett reinforced this logic during a CNBC interview, stating, “If we are taxed at 20%, we should be able to do it, and if tariffs go down, we lower them.” Trump emphasized that the world has been exploiting the U.S. for years, imposing significant tariffs while the U.S. has been more lenient.
Which Nations Will Be Affected?
The impact of these tariffs hinges on how the U.S. government interprets its reciprocity principle; data can vary significantly by source. Generally, emerging markets tend to impose higher tariffs than developed nations. Hassett noted that “Canada and Mexico are at the same level as us, due to our free trade agreement, as is the United Kingdom. The European Union is 2 to 3 percentage points higher, Taiwan 10 or 11 pp, and India on average 20 pp above.” However, World Bank statistics show that the U.S. currently applies a higher average tariff than European countries (2.72% vs. 1.95%), while India has an average rate of 14.26%, Brazil at 12.38%, and China at 6.54%.
According to the World Trade Organization’s annual report, the EU slightly taxes American goods more than vice versa (4.5% vs. 3.9%). Nonetheless, a greater proportion of American exports to Europe enter without tariffs compared to European exports to the U.S. After adjusting for traded volumes, American tariffs are indeed higher than those of the EU (1.4% vs. 0.9%).
A key uncertainty remains: how the U.S. government defines a “tariff.” Trump has frequently criticized the higher VAT in Europe, equating it to a tariff. He might also aim to “eliminate non-tariff barriers”, as noted by Goldman Sachs, such as differing standards or import restrictions, including those on American hormone-treated beef in Europe.
The Underlying Objectives
The primary aim appears to be “to create uncertainty to make it a negotiation tactic. But uncertainty is a form of corporate tax,” states Jeffrey Schott from the Peterson Institute for International Economics. This strategy may involve using tariffs to leverage concessions that Trump deems advantageous, such as persuading European nations to refrain from exploiting mineral resources in Ukraine or encouraging them to purchase more American liquefied natural gas.
Ultimately, it remains to be seen whether this approach serves as a final objective or merely a starting point. Throughout his campaign, Trump consistently advocated imposing tariffs ranging from 10% to 20% on all products entering the U.S., a figure substantially higher than what reciprocal tariffs would entail.