CICC: Trump's "Reciprocal Tariffs" Outlook

I. How Broad is the Taxation Scope?

The reciprocal tariff policy was first announced on February 13, when Trump stated, "Any country that imposes tariffs on U.S. goods, the U.S. will impose the same rate on their goods, no more, no less," emphasizing fairness and reciprocity in tariffs. However, recently, Trump indicated that the reciprocal tariff policy also has "flexibility," and he "may grant reductions to many countries," but must ensure the principle of reciprocity. Last week, U.S. Treasury Secretary Mnuchin stated that Trump may focus reciprocal tariffs on the main sources of the U.S. trade deficit. This aligns with our previous judgment in "The Content and Impact of Trump's 'Reciprocal Tariffs'," which suggested that "countries and regions with a trade surplus with the U.S. and higher tariff rates are more likely to be targeted by reciprocal tariffs."

Based on this, we focus on the 15 economies with the largest U.S. trade deficits (Chart 1), where in 2024, imports from these economies accounted for 86% of total U.S. goods imports, and U.S. exports to them accounted for about 74% of total U.S. goods exports.

Chart 1: Top 15 Sources of U.S. Goods Trade Deficit

Source: CEIC, CICC Research Department

If Trump focuses tariffs on major countries, it may be due to several considerations: First, these economies encompass the largest sources of the U.S. trade deficit, prioritizing them can send a clearer signal of the desire to reduce the trade deficit and promote the return of manufacturing. Second, by focusing on key economies, it is more conducive to accelerating negotiations with the U.S., proactively making concessions on tariffs, non-tariff barriers (such as value-added tax, industrial subsidies), and investment in the U.S. For example, on March 24, South Korea's Hyundai Motor announced at the White House that it would increase its investment in the U.S. by $21 billion, to which Trump responded, "This investment clearly shows that tariffs are very effective." Third, focusing also helps provide "maximum certainty" for U.S. businesses and consumers, facilitating their planning for future decisions. However, we have always emphasized that tariffs disrupt existing resource allocation, raise prices, reduce growth, and exacerbate short-term economic fluctuations.

II. How High are the Tariff Rates?

Reciprocal tariffs aim to level the tariff rate differences between the U.S. and its trading partners, while Trump also views tax policies such as value-added tax (VAT) and digital services tax as unfair competitive means. Therefore, we believe that Trump may include some value-added tax in reciprocal tariffs. We have listed the most favored nation tariff rates and their VAT rates for the 15 economies with the largest U.S. goods trade deficits (Chart 2). According to data published by the WTO in 2023, among these 15 economies, 12 have a weighted average tariff rate higher than the U.S. rate of 2.2%. When combined with VAT rates, all economies except Japan have rates higher than the U.S., with India, the EU, South Africa, Mexico, and South Korea having rates exceeding 18%. If reciprocal tariffs are levied based on VAT rates, these economies will be significantly impactedChart 2: Tariff Rates and VAT Rates of 15 Economies and the United States

Note: The VAT rate for the European Union is the average of the EU countries; India classifies goods and services into five different tax rates: 0%, 5%, 12%, 18%, and 28%, with no standard tax rate, but the rate for most services is 18%; Japan imposes a consumption tax, while the United States and Malaysia impose a sales tax, and thus are not listed in the chart.

Source: https://www.dits.deloitte.com/#DomesticRatesSubMenu (accessed on March 26, 2025), "World Tariff Profiles 2024," WTO, CICC Research Department

Additionally, since China has already been subjected to an additional 20% tariff by the United States, it will not be targeted under the framework of reciprocal tariffs due to excessively high tariff rates. However, Trump signed an executive order titled "Trade Policy for America First" the day after his inauguration, directing relevant agencies to review the Phase One trade agreement reached with China in 2020. This report will be released on April 1 and is worth paying attention to.

III. Are There Any Exemptions?

Mexico and Canada may receive some exemptions. On one hand, the North American supply chain is deeply intertwined, with Mexico and Canada being the first and second largest trading partners of the United States, respectively, accounting for 30% of the total U.S. foreign trade volume in 2024. If high tariffs are imposed on Mexico and Canada, it could significantly impact U.S. consumption and businesses. On the other hand, the United States has signed the "United States-Mexico-Canada Agreement" (USMCA) with Mexico and Canada. This agreement aims to provide a stable framework for North American trade and reduce uncertainty. Therefore, Trump may use the imposition of tariffs as a means to "force" a revision of the USMCA with Mexico and Canada or to strengthen trade enforcement to close the "backdoor" to the United States. However, during the implementation of tariffs, certain exemptions may be granted, such as extending the exemptions for imported goods that meet USMCA preferential conditions, which are set to expire on April 2.

IV. Possible Scenarios

Prior to this, the Trump administration had already imposed a 20% additional tariff on China, a uniform 25% tariff on steel and aluminum products, and tariffs on Mexico and Canada. On March 26, Trump signed a notice announcing a 25% tariff on imported automobiles and certain parts. Based on this, we outline three possible scenarios for reciprocal tariffs as follows:

► Baseline Scenario: The United States levels the most-favored-nation tariff rates with 15 economies and adds one-third of the VAT rate. The tariffs on Mexico and Canada are reduced to 15%. Consequently, the effective tariff rate in the United States will increase from 2.4% by 13.9 percentage points to 16.3% (Chart 3)► Mild Scenario: The United States levels the most-favored-nation tariff rates with 15 economies, without adding value-added tax. Tariffs on Mexico and Canada are reduced to 15%. The effective tariff rate in the United States will rise to 13.3%.

► Extreme Scenario: The United States levels the most-favored-nation tariff rates with 15 economies and adds two-thirds of the value-added tax rate. Tariffs on Mexico and Canada remain at 25%. The effective tariff rate in the United States will rise to 20.2%. In this case, the U.S. tariff rate will reach the level after the implementation of the Smoot-Hawley Tariff Act of 1933.

Chart 3: Changes in the effective tariff rate in the United States under three scenarios

Note: 1900-1918 and 2024 are U.S. government fiscal years, 1919-2023 are calendar years, and 2025 is an estimate by CICC.

Source: USITC, Wind, CICC Research Department

Finally, we estimate the impact of tariffs on the U.S. economy. We assume that U.S. consumers and overseas producers share the tariff losses equally, meaning half of the cost increase is passed on to U.S. consumers, while the other half is borne by trade partners, and we assume the tax multiplier in the U.S. is about 1 within a year. The results show that under the baseline scenario, without considering exchange rate changes, tariffs will raise PCE inflation by 1.1 percentage points, increase U.S. fiscal revenue by $453 billion, and reduce U.S. real GDP growth rate by 0.8 percentage points. In the mild scenario, tariffs will raise inflation by 0.9 percentage points, increase fiscal revenue by $353.2 billion, and reduce U.S. real GDP growth rate by 0.6 percentage points. In the extreme scenario, tariffs will raise inflation by 1.5 percentage points, increase fiscal revenue by $579.1 billion, and reduce U.S. real GDP growth rate by 1 percentage point. If the U.S. dollar appreciates, the impact on inflation and growth will decrease. Under the baseline scenario assumption, if the U.S. dollar appreciates by 5%, the aforementioned tariffs will raise PCE inflation by 0.7 percentage points and reduce GDP growth rate by 0.5 percentage points. If the U.S. dollar depreciates, the negative impact will intensify.

Author of this article: Xiao Jiewen, Lin Yuxin, et al., Source: CICC Insights, Original title: "CICC: Trump’s 'Reciprocal Tariffs' Outlook"

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