What would be the impact if Trump’s new round of reciprocal tariffs were fully implemented?

Core Viewpoints

Overview: As the window for the postponement of "reciprocal" tariffs closed on July 9, Trump has once again stirred up the tariff controversy. Following last week (Beijing time, July 8), Trump announced that he had sent "tariff letters" to 14 countries, and previously, after announcing a framework trade agreement with Vietnam (raising the U.S. tariff rate on Vietnam to 20% and imposing a 40% tariff on transshipment trade, for specific analysis see "Tariff Controversy Resurfaces: Impact and Outlook," 2025/7/9). Between Thursday and Saturday last week (July 10-12), Trump continued to escalate the "reciprocal" tariff rates, while also presenting reasons for the tariff increases and conditions for tariff reductions: ① proposed a 50% tariff on Brazil starting August 1; ② proposed to raise the reciprocal/fentanyl tariff rates on the EU, Mexico, and Canada to 30% and 35% (excluding industry tariffs). This aligns with our previous prediction that the impact of the "tariff letters" would spread to more economies. This article analyzes the potential impact of the newly added tariff "threat." Looking ahead, we maintain our previous judgment that ① reciprocal tariffs and fentanyl tariff rates still face multiple uncertainties; ② global trade growth may decline after July 9; ③ the policies of imposing tariffs under Section 232 and Section 301 investigations are more "substantial," while the use of IEEPA (International Emergency Economic Powers Act) to impose tariffs is "substantial yet insubstantial"; ④ we maintain our previous judgment that the overall U.S. tariff level may fall between 15-20%, but the "structure" may change—tariffs on specific categories may be more persistent, while the speculation of imposing tariffs using IEEPA may be stronger.

1. Trump’s New Tariff Increases on Brazil, the EU, Mexico, and Canada: Reasons and "Solutions" Vary

• On July 9, Trump announced that the reciprocal tariff rate on Brazil would be raised to 50%, effective August 1. If fully implemented, Brazil will become the country with the highest tariff rate in this round of "reciprocal tariffs." In his "tariff letter" to the Brazilian president, Trump stated that the significant increase in reciprocal tariffs on Brazil (excluding industry tariffs) is based on both economic and non-economic motives: on one hand, Trump indicated that part of the reason for the tariff increase is to "correct the serious injustices of the current regime in Brazil," especially regarding Brazil's treatment of former President Bolsonaro; on the other hand, imposing higher reciprocal tariffs also serves as a counterattack against the unfair treatment of U.S. companies in Brazil (such as unfair trade relations caused by Brazil's tariffs, non-tariff policies, and trade barriers). The 50% tariff demand on Brazil further confirms that Trump views tariffs as a universal leverage for negotiations in many areas.
• On July 12, Trump stated that he would raise the reciprocal tariff on the EU to 30%. However, Trump also mentioned that if the EU opens its trade market to the U.S., cancels tariffs, non-tariff policies, and other trade barriers, the U.S. may consider making corresponding adjustments to its tariff policy
• On July 10 and July 12, Trump stated that he would raise the tariffs on fentanyl from Canada and Mexico from 25% to 35% and 30% respectively (not covering products exported under USMCA); however, this tariff rate is also not "permanent"—if Mexico achieves substantial results in combating drug cartels and preventing the influx of fentanyl, the tariff rate on Mexico may be lowered.

2. What is the impact if the new reciprocal tariffs are fully implemented?

If the latest tariff rates on Brazil, the European Union, Canada, and Mexico are fully implemented, the effective tariff rate in the U.S. may further rise to 18-23% starting August 1, a level not seen in a century (Chart 1). Previously, in "The Resurgence of Tariffs: Impact and Outlook" (2025/7/9), we summarized the impact of the new tariff policies as of July 8—if corresponding tariffs are imposed on the 15 countries that received tariff notices at that time, and if the tariffs on goods subject to the 232 investigation are finalized by the end of August, considering some exemptions and the impact of "diverted" trade, it is roughly estimated that the U.S. weighted average tariff level could rise by 5-6 percentage points to around 15-16%. Further accounting for the new tariffs on the four countries would raise the U.S. weighted average tariff by an additional 3.5-5 percentage points.

From the perspective of import volumes and major imported product categories:

• Raising the reciprocal tariff on Brazil to 50% would increase the effective import tariff rate in the U.S. by 0.3-0.4 percentage points. Among these, the products that may have a significant price impact on U.S. domestic goods are agricultural products (especially coffee, etc.), iron ore, metal products, etc. In 2024, the major products imported by the U.S. from Brazil include agricultural products, iron ore, metal products, machinery, crude oil, etc., with coffee, juice, frozen meat, crude oil, and pig iron accounting for a high proportion of U.S. imports (Chart 2). Since agricultural products and energy account for more than 20% of the U.S. CPI, and metal products are basic raw materials for industry, if Trump imposes a 50% tariff on Brazil, the impact on the U.S. CPI could be significant.
• Raising the reciprocal tariff rate on the European Union to 30% would increase the effective import tariff rate in the U.S. by 2.6-3.5 percentage points (excluding industry tariffs), among which, in addition to the pharmaceuticals, automobiles, and electronic products involved in the 232 investigation, Europe also has a high proportion of exports to the U.S. in machinery, optical instruments, etc.—the U.S. may face inflationary pressure. The European Union is the largest source of imports and the largest trading partner for the U.S., with the EU mainly exporting pharmaceuticals, automobiles, machinery, electronic products, and optical instruments to the U.S., while importing oil, coal, machinery, pharmaceuticals, and optical instruments from the U.S. (Chart 3). If the U.S. imposes a 30% reciprocal tariff on the EU and simultaneously imposes tariffs on pharmaceuticals and electronic products through the 232 investigation, if the EU takes countermeasures, it could create an unfavorable situation of "mutual destruction" for the U.S. and EU economies (see "How to View Trump's Threat of 50% Tariffs on the EU?" 2025/5/25)
• The tariffs on fentanyl targeting Mexico and Canada will be raised from 25% to 30% and 35% (excluding categories covered by USMCA). The adjustment in tariff rates is not significant, but it may have a higher deterrent effect. However, this will also increase the effective import tariffs in the United States by 0.7-1.0 percentage points, with domestic products such as automobiles, electronic computers, and electrical equipment potentially facing greater inflationary pressure. As analyzed in our report "Macroeconomic Impact of U.S. Tariffs on Mexico and Canada" (February 3, 2025), Mexico mainly exports automobiles, computer electronic equipment, and electrical equipment to the United States, while Canada primarily exports oil and gas, automobiles, and metal sheets to the United States. At the same time, the industrial chains of the U.S., Mexico, and Canada are highly integrated, and imposing tariffs on Canada and Mexico may have a noticeable impact on the profits of U.S. multinational companies.

3. Analysis and Predictions Regarding the Tariff Turmoil

• After July 9, even without new tariffs, global trade volume will slow down following the export rush after the tariff pause, and the effects may be more pronounced under the influence of the "tariff letter" and the new tariffs on four countries. Between April 9 and July 9, there was a rush to export during the tariff pause window (Charts 4 and 5). As the rush to export comes to an end, the effects of the U.S. tariffs may become increasingly evident after July 9. Besides the categories that may continue to rush to export due to the upcoming Section 232 investigation, global trade may slow down. If the new round of "reciprocal tariffs" threats from the U.S. are fully realized, global trade volume may even shrink.
• Further increases in tariffs will exacerbate inflation risks in the U.S., especially as the proportion of basic consumer goods and necessities exported to the U.S. from the economies subject to the new tariffs rises, the "perception" of inflation may be stronger. Since July, the U.S. has cumulatively raised the reciprocal tariff rates on 24 countries, which together account for 39% of total U.S. imports in 2024. Moreover, the proportion of basic consumer goods and necessities among the goods subject to tariffs has increased, making the transmission of inflation to the U.S. more apparent, which may also become a constraint on the continued implementation of tariffs. However, in the short term, it may be necessary to observe how rising inflation in the U.S. constrains the enforcement of the new tariffs.
• The reciprocal tariffs imposed by Trump, as well as the fentanyl tariffs, will still face multiple uncertainties. In the tariff letter, Trump clearly stated that if Brazil corrects the severe injustices caused by its current regime, the EU opens its market to the U.S. and eliminates tariffs and non-tariff trade barriers, Canada cooperates with the U.S. to address the fentanyl issue, and Mexico achieves effective results in drug prohibition, the reciprocal tariff rates can be lowered. Previously, Trump's "tariff letter" explicitly stated that if relevant countries open their domestic markets to the U.S. and eliminate tariffs and non-tariff trade barriers, the U.S. could also adjust the reciprocal tariff rates, such as Vietnam's reciprocal tariff rate being reduced from 46% announced in early April to 20% after reaching a trade agreement with the U.S. At the same time, it is worth noting that the U.S. Supreme Court may still rule in July-August that the reciprocal tariffs and fentanyl tariffs imposed by Trump under IEEPA are "non-compliant," and it cannot be ruled out that Trump may tactically use tariff leverage more frequently before the ruling is finalized
• Reaffirm that Trump's tariffs based on Section 232 and Section 301 investigations are more "substantial," while tariffs imposed using IEEPA (reciprocal tariffs, fentanyl tariffs) are "substantial yet insubstantial." On one hand, the legal basis for tariffs based on Section 232 and Section 301 investigations is more solid, and based on empirical judgment, Trump has made fewer adjustments to the tariffs related to Section 232 investigations, indicating a lower speculative component. In the future, the proportion of tariffs imposed by the U.S. based on these investigations may continue to rise (see Chart 6).
• Although reciprocal tariffs may be repeatedly adjusted, we reaffirm that the U.S. tariff level may ultimately fall between 15-20%. ① If the U.S. continues to maintain a tariff level significantly above 20%, the impact on U.S. growth, inflation, capital markets, and other aspects may exceed the level that the Trump administration is willing to bear. At the same time, the repeated fluctuations in U.S. tariff policy may exacerbate capital outflows from the U.S. and increase the risk premium on U.S. Treasury bonds, thereby imposing stronger constraints on Trump's use of high tariffs as a negotiation lever (see "On the Inevitability of Disorderly Increases in U.S. Treasury Rates," 2025/4/10). Additionally, ② from the perspective of balancing the fiscal budget over the next decade, the currently implied budget tariff revenue only accounts for a 10-15% increase in effective tariff rates, indicating that the long-term Trump administration may not be hopeful for tariff levels above 20%. It is worth reiterating that as the proportion of tariffs imposed by Trump based on Section 232 and Section 301 investigations increases, the final composition of effective tariffs may change.
• Given that in the second half of this year, major global economies, especially the U.S., will engage in both fiscal and monetary policy expansion, global growth may shift from external demand to internal demand, and the uncertainty of interest rates and exchange rates may be higher than that of risk assets and commodities. In the second half of this year, the U.S., the European Union (especially Germany), Japan, South Korea, the UK, and other major economies are expected to launch fiscal stimulus plans (see "The Immediate Concerns and Long-term Considerations of the U.S. 'Too Big to Fail' Act," 2025/7/7). At the same time, the Federal Reserve may implement preemptive interest rate cuts, and the U.S. may adopt loose monetary policies through bank deregulation (such as lowering SLR requirements) or even changing the duration of Treasury bond issuance to lower interest rates.
• After the U.S. raised tariffs on the EU and Mexico, China's relative advantage as a major importing country to the U.S. has actually increased (or its relative disadvantage has decreased). In the short term, China's export pressure is generally controllable, with greater risks stemming from a decline in global trade volume. It is noteworthy that the U.S. has raised tariffs on 9 economies among its top 20 importing countries, while maintaining the total level of reciprocal and fentanyl tariffs on China at 30%. If tariffs on the EU, Brazil, Canada, and Mexico are fully implemented while maintaining the status quo on tariffs for China, the level of tariffs imposed on China since Trump 2.0 would be roughly on par with that of the EU. Considering that the renminbi has depreciated by 10% against the euro since Trump 2.0, China's export competitiveness has not only been maintained but has actually improved. Indeed, the uncertainty of China's bilateral trade policies with the EU, ASEAN, and South American countries may also increase as a result. However, even if market share is maintained or even marginally expanded, there is still a need for heightened vigilance regarding the indirect impacts on China's external demand from global trade headwinds and rising inflation affecting monetary policy

Author: Yi Han, Source: Huatai Ruis, Original Title: "Huatai | Macroeconomics: Tariff Readjustment - The Illusory 'Reciprocal' Tariff"

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