Saturday, May 10, 2025

Reciprocal Tariffs Are Coming — But No One Knows How They’ll Work

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The implementation of reciprocal tariffs, which U.S. President Donald Trump plans to enforce on April 2, is facing complications.

Initially, the administration considered grouping countries and setting tariff rates accordingly rather than assigning them individually. However, the plan was later reversed, returning to the original country-specific approach, highlighting ongoing uncertainty over the execution method.

Reciprocal tariffs account for import duties and other taxes, such as value-added tax (VAT) and non-tariff barriers. They treat these as tariffs and impose equivalent duties on imported products.

While Trump’s principle of treating countries as they treat the U.S. sounds straightforward, quantifying this approach has proven challenging.

Adding to the complexity, reciprocal tariffs would be imposed on top of existing tariffs, including 25% on Canada and Mexico, 20% additional tariffs on China, and duties on specific products such as steel and aluminum. Additional tariffs planned for semiconductors and automobiles further complicate the calculations.

Despite these challenges, Trump has set April 2 as the implementation deadline, leaving little time for finalizing the details.

On Tuesday, The Wall Street Journal (WSJ) cited sources stating that the Trump administration has been inconsistent in determining how to impose reciprocal tariffs.

Initially, senior officials considered simplifying the process by dividing trading partners into three tariff groups, recognizing the difficulty of applying new rates to hundreds of U.S. trading partners.

However, by March 14, just one day after a March 13 meeting attended by White House Chief of Staff Susie Wiles, Commerce Secretary Howard Lutnick, Treasury Secretary Scott Bessent, U.S. Trade Representative (USTR) Jamieson Greer, White House Deputy Chief of Staff Stephen Miller, Office of Management and Budget (OMB) Director Russell Vought, and Senior Trade and Manufacturing Advisor Peter Navarro, the group-based approach was abandoned, and discussions reverted to individual country rates.

According to the WSJ, Vice President J.D. Vance has been increasingly influential in executing reciprocal tariffs.

In recent weeks, extended discussions have occurred at the vice president’s residence, indicating Vance’s deep involvement in shaping Trump’s trade policies.

Value-added tax (VAT) is a prime candidate for inclusion in reciprocal tariffs. The administration plans to treat VAT as a tariff and impose equivalent reciprocal duties.

The U.S. faces issues with VAT due to its differential treatment of exports and domestic products.

For instance, while Mexico applies a 16% federal sales tax (equivalent to the U.S. rate) with lower rates for essentials, manufacturers can reclaim VAT on exports.

This means Mexican exports to the U.S. are VAT-free, while U.S. exports to Mexico incur VAT, creating what the administration sees as an unfair advantage.

Meanwhile, WSJ reported that experts estimate it will take at least six months to finalize reciprocal tariff rates.

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