Thoughts

February 14, 2025 | 14:01

Reciprocal Tariffs: Tit for Tat

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

On Thursday, President Trump outlined plans for reciprocal tariffs, three days after announcing 25% duties on steel and aluminum imports from all countries effective March 12. No date was set for imposing the reciprocal duties, but they could be rolled out by April 1, when the Commerce Department and the U.S. trade representative are expected to complete reports on implementation.

Developing nations, which often impose higher tariffs to protect developing industries, could be the most harmed by reciprocal levies. India, with a 12% trade-weighted average tariff rate on imports, according to the World Trade Organization, is the most exposed country. But many others, including South Korea, Brazil and Vietnam, have materially higher average tariff rates than the U.S.’s 2.2%. Countries with large trade surpluses with the U.S. will also come under fire, with China squarely in the crosshairs.

Canada might get off relatively lightly, at least in this battle of the trade war. Its average trade-weighted tariff is only about a percentage point above the U.S.’s rate due to the free-trade agreement. But the President also aims to equalize bilateral tariff rates, which might diverge more significantly than the average all-country rate. More importantly, non-tariff barriers, such as government subsidies to industries, perceived unfair taxation, regulations, and even currency valuations, will be considered in the overall assessment, despite their subjective nature. Canada’s (and France’s) digital services tax, and its impact on some large U.S. tech firms, was singled out in the White House’s fact sheet on the “Fair and Reciprocal Plan”.

Several industries may also be targeted, though it’s unclear whether the tariffs will be applied to particular products or total imports. This could put Europe in the spotlight. For example, European Union automakers pay a 2.5% tariff on cars sold in the U.S., a quarter of what American producers pay to sell in Europe. The EU is also implementing a carbon tariff, which will raise duties on U.S. exports, and one that is likely to climb as the new administration walks back climate-control measures.

On a semi-positive note, Commerce Secretary Lutnick said reciprocal tariffs are “a two-way street”, suggesting the U.S. could lower tariffs should other countries do so or remove restrictions on American exports. This means each country will need to come to the table with concessions to avoid new duties.

The reciprocal tariffs won’t have the same inflationary effect as the threatened across-the-board 10%-to-20% tariffs on all countries. But they likely would raise inflation moderately, as the U.S. average trade-weighted tariff could increase a few percentage points. Of course, the reciprocal tariffs would be stacked on top of other potential new duties that would fan the inflationary flames more meaningfully, and at a time when the embers are still warm. In the end, this risk just might be our best hope of avoiding a trade war.