Reciprocal Tariffs: The Hit To Other Countries
Overall, we are still assessing the effects on non U.S. countries from the tariffs being imposed by the U.S. via direct trade/business investment/currency and financial & monetary conditions swings. The impact will be adverse to GDP, but for some major countries could be less than the U.S. However, for China the cumulative country tariff at an extra 54% is now penal for exports to the U.S., while Vietnam and Taiwan exports to the U.S. are a high share of GDP. Meanwhile, the impact outside the U.S. will likely be disinflationary, both as other countries outside the U.S. do not counter with large tariffs and as a production slowdown/business confidence hit hurts employment and income and export dumping intensifies– lower global commodity prices also help. This will allow scope for monetary policy easing in a number of key DM and EM economies (except Japan). We will return with more country-specific articles this week.
What will be the economic effects of U.S. tariffs imposed across all countries and key sectors?
Figure 1: U.S. Reciprocal Tariffs and Goods Exported to U.S./GDP (% and USD Blns)
| US universal and reciprocal tariffs | Goods exports to U.S./GDP (2024) | US Imports in Goods | |
| China | 34% | 3% | 439 |
| European Union | 20% | 4% | 606 |
| Japan | 24% | 2% | 148 |
| Vietnam | 46% | 29% | 137 |
| South Korea | 25% | 8% | 132 |
| Taiwan | 32% | 15% | 116 |
| India | 26% | 3% | 87 |
| United Kingdom | 10% | 3% | 68 |
| Singapore | 10% | 8% | 42 |
| Brazil | 10% | 2% | 42 |
| Mexico | 0% | 23% | 334 |
| Canada | 0% | 19% | 412 |
Source: BEA/Continuum Economics
The economic effects of U.S. tariffs outside the U.S. are multi fold. Key points to note are
· Direct trade effects. The direct trade effects depend on what is implemented and when. A 10% universal base has already been implemented, with the remaining due to be implemented April 9. However, lingering hopes remain that that the reciprocal tariffs could be paused for a period (e.g. 90 days), which would likely reflect financial market reaction and also time to assess potential negotiations apparently from up to 50 countries. If the full scheduled reciprocal tariffs were implemented, then the impact on other countries economies would vary. Figure 1 shows the percentage of exports to the U.S. to GDP, which is very high for Vietnam/Taiwan and Singapore and moderately for other countries. Also considerations need to be made of reciprocal tariffs not being applied to products with tariffs or potentially liable to tariffs at 25% or potentially lower (e.g. cars/steel/pharma/ semiconductors/lumber/copper). As an example of the direct trade effects models would suggest 0.3.-0.4 ppt off EU GDP, given assumptions of only partial passthrough in prices to U.S. consumer to sustain exports (we shall return later in the week with a more detailed EZ article). The direct effects on the U.S. will be larger, as the U.S. is imposing tariffs on all countries but the EU is only countering at lower levels against the U.S. and no extra tariffs against other countries.
· Business investment freeze. Any plans to build factories to export the U.S. will in a lot of cases be put on hold, until demand and profitability can be reassessed. Building new factories in the U.S. for certain goods could occur this year, if the profitability works and provided that trade policy uncertainty decreases – some may wait, as they fear U turns by the Trump administration. Some sectors (e.g. clothing production) will not profitabilitystart new production given high cost U.S. labor and this will mean little new U.S. factories for sectors like clothing.
· Currency appreciation/Dumping. The USD has fallen modestly since the announcement of reciprocal tariffs. If this is extended it could impact profitability of production in countries outside the U.S. and produce a decision to switch production to the U.S., if spare production capacity exists. We will watch this issue, but competiveness issues via currency appreciation on a nominal and real exchange trade weighted basis are not yet noticeable. A separate risk is that China and other countries could decide to dump goods on other countries away from the U.S. e.g. EU. This would impact net exports and could cause pressure for some tariffs between countries outside the U.S.
· Financial/Monetary conditions tightening. The fear of a U.S. recession has prompted a sharp selloff in global equities/widening of corporate bond spreads, with only a modest decline in government bond yields. Financial conditions are less friendly and markets need to be watched to see whether lasting effects exist on the levels of non U.S. issuance of bond/equities. Meanwhile, the global banking system will likely become more cautious at least for a while, as fears of a U.S. recession causes a global tightening of credit supply initially. Whether this will cause more prolonged credit caution outside the U.S. depends on incoming economic data and policy stimulation in each economy
Overall, we are still assessing the effects of non U.S. countries from the tariffs being imposed by the U.S. on direct trade/business investment/currency trends and financial & monetary conditions. The impact will be adverse to GDP, but for some major countries could be less than the U.S. However, for China the cumulative country tariff at an extra 54% is now penal for exports to the U.S., while Vietnam and Taiwan exports to the U.S. are a high share of GDP. Meanwhile, the impact outside the U.S. will likely be disinflationary, both as other countries outside the U.S. do not counter with large tariffs and as a production slowdown/business confidence hit hurts employment and income – lower global commodity prices also help. This will allow scope for monetary policy easing in a number of key DM and EM economies (except Japan). We will return with more country specific articles this week.