Trump Tariffs: China and UK Precedents
The U.S./China have announced major reductions in reciprocal tariffs to 10% with other measures postponed for 90 days. Though the U.S. is still imposing an extra 20% due to fentanyl, China will likely make some moves that could also help to reduce this. This is in line with our previous thinking and is good news, as it dials the temperature down on the trade wars. However, a U.S./China trade deal will take 6-9 months due to major differences over reducing the bilateral trade deficit. Meanwhile, the U.S./UK trade framework shows that 10% is the likely minimum reciprocal rate and other countries may not get as favorable product exemptions as the UK.
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 weekend U.S./China trade discussions and last week framework trade deal have a number of implications.
· U.S./China. Reciprocal tariffs have been reduced to 10% for China and the U.S. effective this week after the Geneva meeting, with the extra amounts postponed for 90 days. In reality the penal extra reciprocal rates are unlikely to return, but is just a negotiating tactic now and extra reciprocal tariffs are unlikely to be imposed if trade negotiations are carrying on between China and the U.S. Though the U.S. is still imposing an extra 20% due to fentanyl, China will likely make some moves that could also help to reduce this. The fact that it was not reduced now is likely for Trump to posture to U.S. voters. This is in line with our previous thinking and is good news, as it dials the temperature down on the trade wars. Firstly, the trade freeze with China will now likely ebb. With inventories already in the U.S., this could mean that the hit to supply chains is temporary. Additionally, the price hikes in the U.S. will now likely be scaled back meaning less of a hit to demand and the U.S. economy – this also lower the risk of a U.S. recession. However, a U.S./China trade deal will take 6-9 months due to major differences over reducing the bilateral trade deficit. Greer noted that the U.S. still wants China to commit to buying more imports from the U.S. to reduce the bilateral trade deficit. Additionally, with the reduction in the effective rate and reducing immediate domestic U.S. political pressure, this will likely make the U.S. willing to push hard in the real negotiations. The effective reciprocal rate in an eventual deal could be higher than 10%, though with the fentanyl number going to 10% or zero.
· UK framework precedents. The U.S. agreement to reduce car and steel/aluminum tariffs from 25% for the UK shows some U.S. flexibility to get a deal. However, the 10% for UK car exports to the U.S. is set at 100k, which will likely be used with Japan and EU as well and could end up mean an effective hybrid tariff for cars. Meanwhile, the UK is a small exporter of steel and aluminum to the U.S. and a UK exemption may not be matched for large exporters to the U.S. The UK agreement also keeps the 10% reciprocal tariff base, which is likely to be a minimum for other trade agreements. Finally, the agreement is only a partial trade agreement, rather than a full trade deal. This is designed to reduce damage, rather than to significantly boost bilateral trade.
· Other bilateral deals. The UK deal is being followed by active negotiations with Japan, India, Vietnam and S Korea. However, these countries will be looking for a UK style damage limitation deal that reduce tariffs from the maximum in exchange for some small/modest concessions. They will let Trump has his PR victory parade, but in reality they will be merely reducing the adverse economic hit. We would suspect that the average reciprocal and product rate is unlikely to be better than the UK and some could achieve a 10% reciprocal tariff but other with large trade surpluses could end up with around 15%.
Overall, the effective overall U.S. tariff rate will now fall below 15% versus the 25% up until the weekend. This is still bad news for U.S. growth and will boost U.S. inflation, but the impact will be less and the U.S. recession risk is reduced with the agreement. However, uncertainty on the scale of impact exists on both as the Fed has highlighted and we will wait for more data in the next few months before amending our view. April and May data could also look worse than June/July, which will an extra consideration for the market and policymakers.