What impact will Trump’s tariffs have on major trading nations?

On February 13, US President Trump signed a memorandum instructing the introduction of “reciprocal tariffs”, which will raise the US tax rate to the same level as the tariffs imposed by foreign countries on US products. The main targets envisioned are countries such as Germany and India that impose higher tariffs than the United States, and countries such as Japan that have non-tariff barriers such as regulation. In the future, after investigating each country and region separately, individual countermeasures will be taken.

The United States will investigate countries and regions around the world. Trump said that if you want to avoid reciprocal tariffs, “you just need to reduce or eliminate tariffs on US products.”

Japan is also among the targets of the investigation.

A senior White House official told reporters on the 13th: “The investigation will start with countries with the largest trade deficits with the United States and countries with serious problems.” He believes that the investigation period varies from country to country and “will be completed in a few weeks to a few months.” It is expected that reciprocal tariffs will not take effect immediately, and the investigation will be conducted by the Office of the United States Trade Representative (USTR) and the US Department of Commerce.

The main purpose of reciprocal tariffs is to make the tariff burden of the United States and its trading partners equal. Take automobile tariffs as an example. The United States has a 2.5% tariff, while the European Union (EU) has a 10% tariff. Trump believes that this difference in tariffs and the existence of regulation are “unfair” and that the reciprocal tariff policy can raise the US tariff to the same level.

Trump predicted that after the announcement of the reciprocal tariff policy, the EU “will reduce the automobile tariff from 10% to 2.5%.” When signing the memorandum, Trump stated that the objects involved in the reciprocal tariff also include automobiles.

Senior White House officials also specifically mentioned Japan, saying that “structural (non-tariff) barriers are high.” The “specifications” and safety standards of Japanese industrial products may become the objects of verification by the United States.

The legal basis for reciprocal tariffs is likely to involve multiple laws. Senior White House officials said that three legal provisions will mainly apply, in addition to Section 232 of the US Trade Expansion Act, which imposes additional tariffs according to different product areas, and Section 301 of the Trade Act, which imposes additional tariffs according to different countries and regions, it also includes the International Emergency Economic Powers Act (IEEPA).

Consumption tax is also included when comparing tax rates

The characteristic of this reciprocal tariff is that the consumption tax of the other country is included and the tax rate comparison mechanism is implemented. Trump said: “Consumption tax will also be considered as tariff.” Although the main target is the European Union, which has a higher consumption tax rate, Japan may also become a verification target.

For example, the case of exporting cars from the United States to the European Union. The basic tax rate of consumption tax (value-added tax) in EU member states is more than 20% on average, and is usually paid by importers when paying tariffs at customs. Therefore, from the perspective of the United States, the total tax rate of 10% plus consumption tax exceeds 30%.

On the other hand, when exporting from the European Union to the United States, the European Union’s consumption tax is exempted, so the products enter the US market at a lower price than if they are sold within the European Union. Howard Lutnick, an entrepreneur and candidate for US Secretary of Commerce, criticized this mechanism as “similar to export subsidies.”

The main reason why the Trump administration prefers this interpretation is that the United States does not have a consumption tax at the federal level. The United States only needs to pay tariffs when importing European cars.

The European Union and other countries may refute that the United States has a fundamental misunderstanding of consumption tax. Each state in the United States also has a “sales tax” similar to the consumption tax, and the final tax burden is similar. Countries may also point out this contradiction.

“Uniform tariff” is another concept

Trump has said since his campaign that he is considering imposing a “uniform tariff” of 10-20% on the world. Senior White House officials said that reciprocal tariffs and uniform tariffs are different concepts.

Previously, the Trump administration of the United States has successively introduced policies such as additional tariffs on China, Canada, and Mexico, and a 25% additional tariff on steel and aluminum products. Compared with these policies, the impact of reciprocal tariffs is expected to be wider and is regarded as an important part of Trump’s tariff policy.

In the “America First Trade Policy” signed by Trump on his first day in office, the USTR representative was instructed to review whether the tariffs between the contracting countries such as the Free Trade Agreement (FTA) are balanced before April 1.

The investigation into Japan may focus on non-tariff barriers

Since most of Japan’s tariffs have been abolished, the investigation will focus on the actual situation of non-tariff barriers centered on the automotive sector.

Regarding automobile safety standards, the United States has previously expressed dissatisfaction with the fact that its safety standards have not been recognized by Japan as being equal to Japanese standards. The United States believes that “Japan’s independent standards and testing procedures have hindered the development of the distribution and service network (of American cars)”. From the perspective of the United States, Japan is also the fourth largest agricultural product export market calculated by country. For some agricultural products such as rice and wheat, the Japanese government actually controls imports. The United States may further exert pressure on such mechanisms.