Donald Trump has announced a significant revamp of the trade relationships of the US with various partners and allies, introducing what he refers to as a “fair and reciprocal plan” for trade.
On Thursday, the president signed a memorandum instructing his senior advisers to develop a “comprehensive” strategy to address the US trade deficit, primarily by increasing tariffs in response to taxes, levies, regulations, and subsidies that Washington deems unjust.
This action represents the latest move in Trump’s trade agenda during his initial month in office, following warnings of impending tariffs on North American trade partners as well as new duties on metal imports.
What are ‘reciprocal’ tariffs?
In June 2023, Trump vowed that should he win the election, he would push for legislation through Congress enabling him to align US import tariffs with those that other countries impose on US goods. His campaign framed it as “an eye for an eye, a tariff for a tariff, same exact amount.”
However, the strategy outlined has been more expansive. Officials indicated that tariffs would be imposed on a “country by country” basis, responding not only to tariff barriers but also to non-tariff obstacles. The EU’s value-added tax was cited as a key example of an unfair trade practice, alongside the digital services taxes being considered or implemented by various European nations.
Everett Eissenstat, a former Trump trade official now at Squire Patton Boggs, noted that regulations ranging from agricultural standards to vehicle weight limits could face scrutiny.
A fact sheet from the White House detailing the plan stated that the US is “one of the most open economies in the world,” yet contended that its trading partners “keep their markets closed to our exports.”
Implementing the US plan would violate World Trade Organization (WTO) guidelines, which require that member countries offer the same tariff rates to each other unless a bilateral or regional trade agreement has been reached, adhering to the so-called most favored nation principle.
While the US has long deviated from WTO norms, shifting to a reciprocal system would signify a stark change in Washington’s trade policy.
This approach would also differ from Trump’s current strategy regarding metal trade, which sees a blanket 25 percent tariff in place.
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Which countries and products would be most affected?
A senior official noted on Thursday that Japan, India, and the EU would be the primary targets of these new measures, with Brazil also identified in the White House fact sheet.
“Japan has relatively low tariffs but high structural barriers,” the official remarked. “In contrast, India has some of the highest tariffs globally.”
Peter Navarro, senior counselor for manufacturing and trade under Trump, labeled the EU’s VAT as “a poster child” for the types of measures the US tariffs would address, arguing that the EU provides unfair rebates to its own exporters. EU nations impose VAT exclusively on products sold within the bloc, irrespective of origin, while the US has state sales taxes rather than a VAT.
“This effectively triples the EU’s tariff rate on American exports, while heavily subsidizing the EU’s exports,” argued Navarro.
Trump has previously raised concerns about trade practices in China, the EU, and India, referring to analyses from the Coalition for a Prosperous America, a pro-tariff think tank. On Thursday, the White House highlighted that India imposes a 100 percent tariff on US motorcycles, while the US has a mere 2.4 percent charge. They also pointed out that the EU prohibits the import of shellfish from 48 US states.
In terms of tariff exposure, analysts at Morgan Stanley determined that India, Thailand, and South Korea would be most vulnerable to retaliation, estimating a potential increase of four to six percentage points in average tariffs.
Additionally, Japan, Malaysia, and the Philippines were identified as potential targets based on their elevated average tariffs, with Barclays analysts including Indonesia and Vietnam in this group.
The EU could face repercussions as well, as it imposes a 10 percent tariff on car imports while the US only has a 2.5 percent rate. Cars represent 8 percent of EU exports to the US.
According to WTO data, the trade-weighted average tariff for the US is 2.2 percent, contrasting with India’s average rate of 12 percent and a staggering 177 percent for oilseeds, fats, and oils.
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Could US tariffs go down as well as up?
A White House spokesperson indicated on Thursday that the US aims to engage in “discussions with nations globally regarding the imbalanced trade environment resulting from existing structures.”
“The president is very open to reducing tariffs, should countries be willing to do the same,” the official stated, while claiming that high tariffs often pose a lesser trade barrier than policies such as taxes.
Scott Lincicome, vice president at the free-market Cato Institute, expressed skepticism regarding a truly reciprocal system that could lower US tariffs on manufactured goods from Europe, Mexico, Canada, or the UK, where tariffs are sometimes lower.
“I remain doubtful that our tariffs — including the 25 percent tariff on light trucks and those on clothing and footwear — will decrease,” he asserted.
The US is also a frequent user of trade defense instruments, which allow for tariffs in specific scenarios such as during surges in imports. Washington also ensures that certain subsidies are exclusively available to domestic companies and employs regulatory standards to keep foreign products out.
“Many foreign nations impose protectionist barriers against American goods, services, and investments, but the US is not innocent in this regard,” Lincicome added.
What has Trump done so far?
Trump has utilized tariffs as a negotiating tactic and to protect US industries, often expressing concerns over the trade deficit. His directive to establish a reciprocal tariff plan comes alongside other measures that do not consistently adopt a reciprocal framework.
The president’s threats to introduce tariffs against Canada and Mexico prompted both nations to quickly demonstrate their efforts to secure their borders and combat fentanyl trafficking, aligning with Trump’s demands.
Additionally, Trump has shown readiness to impose significant tariffs to safeguard particular US industries, instituting a blanket 25 percent tariff on all steel and aluminum imports effective March. Officials have stated there would be no exemptions applied to any companies or products.
He has also fulfilled his promise to enforce a 10 percent tariff on all imports from China, impacting everyday consumer items.
Complementing these early actions, Trump has instructed officials to investigate whether foreign nations are imposing unfair taxes on US companies, the factors behind the US’s enduring trade deficit, and whether countries are manipulating their currencies.
How will other countries respond?
Some nations have already begun to take action. Earlier this month, India reduced duties on certain US imports, including Harley-Davidson motorcycles—a longtime grievance for Trump, which he labeled “unacceptable.”
Despite being one of the largest purchasers of Russian oil, Trump declared that the US would “be a leading supplier of oil and gas to India” during a joint press conference with Prime Minister Narendra Modi on Thursday.
He stated that he and Modi would negotiate “long-standing disparities” related to trade.
According to reports from the Financial Times, EU representatives have signalled a willingness to equalize car tariffs with those of the US to prevent punitive measures against their own exports. Brussels has also expressed interest in increasing imports of US liquefied natural gas.
The potential reaction of the EU and UK to significant retaliation regarding their VAT systems remains uncertain, as they view these as neutral trade mechanisms and integral parts of their tax structures. No other trading partner has threatened such a stance.
EU representatives have communicated to the FT that they believe the bloc will not alter its VAT system under US pressure, having successfully defended it against US measures at the WTO during the 1990s.
The EU has so far pledged “firm and proportionate” retaliation in response to tariffs on steel and aluminum, while the UK has indicated it likely will not respond in an effort to avoid exacerbating inflation.
In response to US tariff increases, China on Monday implemented limited countermeasures affecting approximately $14 billion of US imports. However, its rhetoric has been relatively mild compared to the initial stages of the Trump trade conflict.
“There are no winners in a trade war or tariff conflict,” remarked China’s foreign ministry. “We urge the US to cease politicizing and weaponizing economic and trade issues.”
