Trump Moves to Impose Reciprocal Tariffs as Soon as April
President Donald Trump ordered his administration to consider imposing reciprocal tariffs on numerous trading partners, raising the prospect of a wider campaign against a global system he complains is tilted against the US.
The president on Thursday signed a measure directing the US Trade Representative and Commerce secretary to propose new levies on a country-by-country basis in an effort to rebalance trade relations — a sweeping process that could take weeks or months to complete. Howard Lutnick, Trump’s nominee to lead the Commerce Department, told reporters all studies should be complete by April 1 and that Trump could act immediately afterward.
Fresh import taxes would be customized for each country, meant to offset not just their own levies on US goods but also non-tariff barriers the nations impose in the form of unfair subsidies, regulations, value-added taxes, exchange rates, lax intellectual property protections, and other factors that act to limit US trade, according to a copy of the memo distributed by the White House. Markets reacted positively to signs the tariffs aren’t expected to start immediately. (…)
Trump told reporters that he would enact import taxes on cars, semiconductors and pharmaceuticals “over and above” the reciprocal tariffs at a later date.
Trump cited barriers in the European Union, including a VAT, as an example of what the US is looking to respond to. Trump has also singled out Japan and South Korea as nations that he believes are taking advantage of the US, and thus could be targeted in his latest push, according to a White House official who briefed reporters before the announcement. (…)
Trump said he did not expect to issue exemptions or waivers. He said that despite giving Apple Inc. a pass on tariffs he imposed on China during his first term in order to compete with Samsung Electronics Co. Ltd., this tariff package “applies to everybody across the board.” (…)
Reciprocal tariffs are expected to hit hard in less-developed economies where average duties on US products are higher, according to Bloomberg Economics. It differs from a universal levy on all imports, as Trump proposed during the 2024 presidential campaign. The official said Trump could divert back to a global tariff strategy later on.
Trump announced his move just hours before he was set to host Indian Prime Minister Narendra Modi, whose country stands to be affected by reciprocal tariffs more than many other major trading partners. Trump has repeatedly criticized India’s high tariff barriers. Trump has taken repeated aim at the EU’s 15% VAT. Japan also has a VAT, known as a consumption tax.
The breadth of Trump’s envisioned tariff plan is breathtaking, setting off a massive logistical undertaking for Commerce and USTR. Trump’s action opens the door to develop analyses and calculations for nearly 200 other nations, each with their own tariff schedules containing thousands of tariff codes. That’s not to mention the challenge of determining the value of other nations’ regulations, fiscal policies and subsidies. (…)
Trump blames US bilateral trade deficits on unfair trade practices, bad deals negotiated by his predecessors or a combination of both. He’s been especially critical of the EU and what he sees as the unfair treatment of American-made products, especially automobiles and agricultural commodities.
Most economists argue that trade deficits are the product of forces far stronger than mismatched tariffs — they also reflect broader macroeconomic factors such as the consumption of American households relative to those elsewhere, the US dollar’s
reserve currency status and the appetite globally for US assets.
The term “reciprocal,” when used in the context of trade, usually refers to measures taken by both parties to ensure fairness in bilateral commerce. In recent decades, that has typically meant lowering trade barriers. In the US, the Reciprocal Trade Agreements Act of 1934 marked the end of an era of American protectionism and allowed the US and partner countries to negotiate lower tariffs on each others’ goods. (…)
These so-called “non-tariff barriers” are hard to quantify, creating an enormous challenge for the Office of the US Trade Representative and the Commerce Department, which are tasked with proposing the new levies on a country-by-country basis.
Reciprocal tariffs could be imposed in a number of ways: They could be applied to specific products, to entire industries, or as an average tariff on goods arriving from a specific country.
Theoretically, the US could lower tariffs in some cases, for purposes of reciprocity, though this seems unlikely given Trump’s protectionist stance. (…)
India, Argentina and much of Africa and Southeast Asia would be most exposed, according to Bloomberg Economics, which compared tariff rates between the US and its trading partners.
But much of the world could be affected, given that the Trump administration is looking at a more general definition of trade “fairness.” The US has an overall trade deficit, meaning it imports more from other countries than they import from the US, and Trump sees this imbalance as fundamentally unfair. He repeatedly has lamented value-added taxes on US-made goods sold in other countries, particularly the European Union’s 15% VAT. Japan also has a VAT, known as a consumption tax. (…)
Goldman Sachs recently estimated that a reciprocal plan that focuses only on tariff differentials would raise the US effective tariff rate by 1-2pp, while a plan that included value-added taxes (VATs) could add more than 10pp to the US average effective tariff rate. A plan that also included other non-tariff barriers could raise it even further.
ING:
Given the time required for these investigations and implementations, the process is likely to start with trading partners with the highest trade deficits and higher tariffs than the US: China, the EU (with Germany and Ireland leading), Vietnam, Japan, South Korea, Taiwan, and India.
In theory, to avoid tariffs, these countries could lower or abolish their tariffs or manufacture their goods in the US.
Yet, there is a difficulty in lowering tariffs for one country only, as this would trigger the Most Favoured Nation (MFN) principle, which requires a country to extend the same favourable trade terms to all its trading partners that it grants to any one of them, i.e., granting the lowest tariff to any other nation with MFN status. Likewise implementing reciprocal tariffs would also conflict with the MFN clause, because it involves treating different countries differently based on their specific trade policies, undermining one of the key pillars of the World Trade Organisation (WTO).
But there is an even more significant caveat in this announcement: the investigation into the value-added tax (VAT) system, a tax on final consumption, which the US administration views as similar to a tariff.
Countries could, in principle, lower their tariffs to US levels. However, abolishing the VAT system is extremely unlikely. In the EU, VAT revenues account for 7.5% of GDP and 18.6% of total tax revenues (as of 2022). The EU-27 average standard VAT rate was 21.5% in 2023, with Luxembourg at 16% and Hungary at 27%. Globally, 175 countries have a VAT system, with the US being one of the few exceptions, using a sales tax system by state varying from 0% to 11.5%, instead. Since VAT is typically applied as a destination-based tax, meaning it is charged based on where the goods or services are consumed rather than where they are produced, it aligns with WTO principles.
Avoiding tariffs, therefore, seems to be an impossible task, especially since the memo is not limited to tariffs, nor VAT, but extends the investigation into non-tariff barriers such as digital trade barriers, exchange rates, and other unfair market access limitations. (…)
Since President Trump sees himself as a dealmaker, we still expect the US administration to use targeted tariffs to gain concessions, at least for the time being. India, Japan, and Australia have already positioned themselves for potential trade deals.
During a summit between the US and Japan in the first week of February, Japanese Prime Minister Ishiba announced plans to raise investment in the US by some $200 billion and to buy more LNG from the US. India’s Prime Minister Modi already slashed tariffs on an array of goods, such as heavyweight motorcycles from 50% to 30% and smaller bikes from 50% to 40%, and scrapped tariffs on satellite ground installations altogether. Also, the Indian government promised to take back undocumented Indian immigrants and pledged to buy more US oil.
But others might not get as lucky. We see Europe and China in the spotlight here, which have long been a thorn in Trump’s side. While the European Union still prefers negotiations, it has positioned itself strongly by announcing plans to fight back against unfair trade practices. In fact, the US also applies higher tariffs to certain product categories, such as clothing (12% in the EU and up to 32% in the US) and light vehicle trucks (10% in the EU and 25% in the US). While a White House official said Trump would gladly lower tariffs if other nations lowered theirs, it highlights the complexity and the challenges in achieving mutually beneficial agreements. (…)
But while initial deals might be made, the goal of increasing tariff revenues for domestic tax cuts could lead to unilateral tariffs. And the complexity of the customs project will make it easy for the US to take targeted country-by-country measures as of April. This means a bumpy ride ahead. President Trump has set the stage for further trade escalations, and with retaliation likely, things could get nasty pretty soon.
(…) To show that he really meant it, Trump admitted in as many words that this would probably mean higher US inflation in the short term, although he was confident the measures would eventually pay for themselves. In the current climate, that was a big admission and showed that he was prepared to lead the US electorate into making sacrifices; much more serious than had previously been expected. However, there were no dates, no specifics, and he didn’t even sign the by-now-customary executive order, instead merely signing a memo directing others to work on it.
Mike Reynolds, investment strategist at Glenmede, said:
Part of the rally we’re seeing today is a relief from the fact that these reciprocal tariffs aren’t immediately imminent. The second part of it is we think that there’s been these discussions within the White House, whether it’s more appropriate to just do blanket universal tariffs where everybody gets 10%, or if this more nuanced approach of reciprocal tariff… We think this just gives other countries a little more opportunity to save face and avoid a tit-for-tat escalation.
It’s also possible to argue that the whole thing lacked credibility. (…)
For all the threats, Trump is plainly fishing for concessions from others. If he wanted to go ahead with a simple blanket tariff of 10%, and mimic his idol President William McKinley by funding the Treasury with tariffs, he could do that, but he’s choosing not to do so. Marko Papic of BCA Research argued:
We’ve now had several successive pieces of evidence that President Trump favors reciprocal tariffs, piecemeal tariffs, policy specific tariffs, and not massive across-the-board tariffs. And so the market is reporting positively, even to negative news, because it’s not as negative as it could be. All the S&P 500 cares about is, will there be a double-digit across-the-board tariffs? That’s it.
The future remains messy. It’s tempting to break it down into two green-tinged scenarios. Either Trump is the Wizard of Oz, manipulating reality behind the curtain when there’s nothing there, or he’s the Incredible Hulk, who will soon shock everyone by bursting out as the terrible Tariff Man. The reality is somewhere between the two, and there is much money to be made and lost between the extremes.
At present, the market’s bet that Trump is the Wizard of Oz looks over-confident. He has a mandate to reverse globalization, he plainly believes in it, and he won’t win meaningful concessions unless he goes through with serious trade levies at least once.
President Donald Trump’s threat to slap tariffs on imported vehicles puts a $240 billion trade route in the crosshairs, with some of the biggest brands in Germany and South Korea among the most exposed.
Imports accounted for roughly half of the US auto market last year. About 80% of Volkswagen AG’s US sales are imported, while 65% of Hyundai–Kia’s US sales are imported, according to figures from Global Data, a market researcher. Mercedes-Benz Group AG brings in 63% of its US deliveries from overseas.
It’s unclear how large any new import taxes on automobiles may be, and whether vehicles built under a free trade agreement with Canada and Mexico would be spared from industry-specific duties, should they take effect.
A broad levy on all imported vehicles would have sweeping impacts across the industry. The US imported about 8 million new passenger cars and light trucks last year, with a total value exceeding $240 billion, according to Commerce Department data.
Decades of free trade agreements have helped make North America a hub for automotive manufacturing, with highly integrated supply chains across the continent. Trump had already thrown that structural pillar into question by proposing a 25% tariff on all imports from Canada and Mexico that could take effect next month.
Ford Motor Co. Chief Executive Officer Jim Farley earlier this week warned that those duties alone would “blow a hole in the US industry that we have never seen.”
According to the Observatory of Economic Complexity, in 2023 the U.S. imported $208B worth of cars and exported $65.3B for a net trade deficit of $143B. The main destinations of United States exports on Cars were Canada ($15.8B), Germany ($9B), China ($7.52B), Mexico ($4.46B), and United Arab Emirates ($3.08B).
Between November 2023 and November 2024 the exports of United States’ Cars have decreased by $-479M (-9.18%) from $5.22B to $4.74B, while imports increased by $246M (1.32%) from $18.6B to $18.8B.
The U.S. shows 0.89 vehicles per capita, the highest in the world after New Zealand (0.90).
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Europe: 0.52 vehicles per capita
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South America: 0.21 vehicles per capita
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Middle East: 0.19 vehicles per capita
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Asia/Oceania: 0.14 vehicles per capita
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Africa: 0.06 vehicles per capita
U.S. car exports dropped by 40% since 2014-15. The USD appreciated 45% since 2011. Coincidence?
Also a coincidence?
Asia-based automakers continue to lead the industry in reliability, with an overall average score of 57 for the region on a scale of 1 to 100. This year, 8 of the 10 most reliable brands are from Asian brands. European automakers are in second place at 48, with Audi and BMW making our list of the top 10 most reliable brands.
If you missed it, here’s what I wrote on February 3:
Mr. Trump complains about the U.S. trade deficit, arguing that just about every country in the world treats the USA “very, very badly”.
Imports of goods and services (black) began to significantly outpace income and expenditures in 2014. Coincidentally (or not), this is also when households net worth accelerated as house and equity prices took off after the U.S. emerged out of the Great Financial Crisis.
Wealth exploded even more after the pandemic, initially thanks to the various pandemic-related bounties, but later boosted by continued gains in house and equity prices.
Trends in imports are more in sync with household wealth than with overall income. Various studies have demonstrated the propensity to buy foreign goods and services as income and wealth rise. In the USA, since 2014, real income and consumption rose 34% but real imports gained 45% as real household wealth exploded 72%!
Furthermore, since 2014, the U.S. dollar strongly appreciated making foreign goods and services so much cheaper for Americans, including the lesser wealthy segments. Import prices excluding foods and fuels are only up 7% against the 37% increase in core inflation.
Prices of imported goods ex-vehicles rose 2.6% between 2014 and 2024 while CPI-Durable Goods rose 10.1%. For the same period, CPI-New Vehicles jumped 21.7% while imported vehicle inflation was only 7.7%.
In 2014, 47.8% of motor vehicles sales were assembled in the U.S.. In Q4’24, the ratio was down to 40.3%.
Total real imports of goods and services rose 44.5% since 2014 while the USD appreciated 35.3%; exports only rose 6% since 2018.
All in all, the explosion in wealth and a strong USD largely explain the worsening U.S. trade balance over the last 10 years. Wealthier and cash rich Americans splurged on cheap and cheaper foreign goods and services, first thanks to the Fed’s post GFC policies, then to the U.S. government’s pandemic bounties and, more recently, to the additional boost to wealth from house and equity prices.
The United States’ perennially polite neighbors to the north are miffed. President Trump’s threats of 25% tariffs and annexation are stoking Canadian boycotts, with visible effects on Canadians’ purchasing consideration of many U.S. brands according to new Morning Consult research.
To see whether worsening bilateral relations are taking a toll on U.S. brands’ likely earnings, we looked at changes in net purchasing consideration among Canadian adults between the second week of January and the second week of February (bookending the tariff threat), and found that 52 U.S. brands — almost 70% of the total brands we examined — saw a decline, with 7 brands seeing declines of over 10 points. No brand saw an increase over 10 percentage points and 30% of the brands saw no change or slight increases.
US Inflation News Gets Worse as Wholesale Prices Jump
US wholesale prices rose in January by more than forecast on higher food and energy costs, adding to the growing pile of bad inflation news ahead of more potential tariffs threatened by the Trump administration.
The producer price index for final demand climbed 0.4% from a month earlier, and that after an upwardly revised 0.5% increase in December [from 0.2%!], the Bureau of Labor Statistics said Thursday. The data on wholesale prices comes just a day after a consumer price index report showed underlying inflation at its highest in more than a year.
But, as Ed Yardeni explains, there was good news buried in there:
Some of the key components of the PPI that are used to calculate the Fed’s preferred PCED measure of inflation were benign or lower. For example, healthcare, with a nearly 20% weighting in the core PCED, declined 0.1%. Airline passenger services fell 1.6% m/m (after soaring 6.5% m/m in December).
Goldman Sachs:
Core producer prices also increased by more than expected on net, with the PPI excluding food and energy and the PPI excluding food, energy, and trade services both increasing by 0.3%. However, the components relevant for January core PCE were softer on net. The relevant medical care categories in PPI mostly declined, and we now estimate a 0.05% month-over-month decrease in the PCE medical care services category. We estimate that the core PCE price index rose 0.30% in January (vs. our expectation of 0.35% prior to today’s PPI report). Initial jobless claims ticked down, in line with expectations.
Charts from Ed Yardeni:
1- Headline inflation:
2- Core inflation:
Services are the main problem:
Hmmm…
Trump Floats Deal With Russia, China to Cut Defense Spending
President Donald Trump floated the idea of a three-way meeting with the leaders of Russia and China in which the countries would agree to cut defense spending in half.
Trump, speaking to reporters in the Oval Office Thursday, suggested repeatedly that he’d seek such a deal with Presidents Xi Jinping and Vladimir Putin, saying the money could be spent better elsewhere.
“One of the first meetings I want to have is with President Xi of China, President Putin of Russia,” Trump said. “And I want to say, ‘let’s cut our military budget in half.’ And we can do that. And I think we’ll be able to do it.” (…)
Such deep cuts in defense spending would fundamentally reshape US military posture around the world and face sharp pushback from US contractors and lawmakers whose states benefit from billions of dollars in defense spending every year. (…)
It’s also far from certain that China or Russia would agree to such cuts given how US defense spending of about $850 billion dwarfs their annual outlays. China was forecast to spend about $230 billion on defense in 2024 and is in the middle of a major military expansion. Russia’s 2024 defense budget has grown significantly since the start of war in Ukraine but was still about half that. (…)
“We’re spending the money against each other, and we could spend that money for better purpose if we get along,” Trump said later Thursday at a press conference with Indian Prime Minister Narendra Modi. “And I’ll tell you, I think that something like that will happen.” (…)
