President Donald Trump’s new reciprocal tariff policy will match US tariffs to those faced by American exporters abroad, examining each trading relationship comprehensively. While Southeast Asian differentials appear small, implementation challenges and rising non-tariff barriers complicate the picture. Countries may reduce barriers to avoid retaliation or risk escalation into full trade wars, with higher transaction costs likely regardless of the outcome.

US President Donald Trump’s first few months have been characterised by erratic changes to trade policy. The administration has slapped new tariffs of 10–25 per cent on Canada, China and Mexico, only to defer them more than once. Global tariffs hit steel and aluminium. An earlier threat to impose across-the-board tariffs may be replaced by a reciprocal tariff policy.

The implications of the new policy remain indeterminate until it takes effect on 2 April 2025. But some details are clear. US tariffs will apparently be set to match those faced by its exporters in each country, product-by-product. The 13 February White House memorandum that details this plan also considers ‘any other practice’ that ‘imposes any unfair limitation on market access or any structural impediment to fair competition’. This includes value-added taxes and non-tariff barriers (NTBs). In other words, each trading relationship will be examined in its entirety.

Measuring the tariff-equivalent of NTBs is complex and subject to error and manipulation. The United States must also consider whether to measure the tariff equivalent of NTBs operating in its market. These have increased substantially during the Biden administration, with massive increases in subsidies and the flagrant use of export and import controls. The United States also has a long history of high tariffs on select products, with maximum tariffs above 100 per cent for many agricultural and food products.

A transparent, though incomplete, measure of the unequal trade treatment is the difference in average tariff rates. Using Southeast Asia as an example, the differences with the United States are relatively small. The weighted average tariff in the US in 2023 was 2.5 per cent, which was slightly lower that that faced by US exporters in all Southeast Asian countries except Indonesia. In 2023, the difference was highest for Thailand at just 3 per cent, followed by the Philippines at 2 per cent, Malaysia at 1 per cent and Vietnam at 0.2 per cent.

While tariffs in Southeast Asia have been falling sharply, NTBs have been rising. These differences may underestimate the broader protectionist barriers facing US exporters and could provide US authorities with a pretext for raising tariffs significantly, especially if they ignore NTBs at home in calculating the difference. Maximising the difference in protection levels may increase leverage if this policy is designed as a negotiation tool.

There will be winners and losers from Trump’s policy. A lot will depend on how it is implemented, which remains unclear. Alternative scenarios should also be considered in any assessment of relative impacts. Compared to the status quo of no new tariffs, the impact will be negative for countries that have higher protection rates on US imports than what they face in the United States and neutral for those that do not. Compared to the proposed across-the-board tariff — which would not affect the relative competitiveness of individual countries — the reciprocal tariff policy will create winners and losers. If this policy replaces unilateral tariffs based on metrics like bilateral trade deficits, it will also create winners and losers but remove the uncertainty of unpredictable changes.

In general, impacts will depend on the importance of the United States as a trading partner and will vary by product based on protection level differences.

There are implementation difficulties that could substantially raise transaction costs. Determining the origin of a product in a world of global supply chains is increasingly difficult and costly. The cost of implementing the reciprocal trade policy is akin to the United States implementing a free trade agreement (FTA) with every trading partner.

Trade theory tells us that the cost of implementing ubiquitous FTAs may yield lower welfare for everyone compared to if there were no FTAs or if all trade was subject to a common most favoured nation tariff. A reciprocal tariff policy would also incur these high implementation costs on top of likely tariff increases. Even if this policy leads to lower tariffs in US trade partners, the benefits would be insufficient to offset the implementation costs. Recognising these costs, Treasury Secretary Scott Bessent has proposed focusing on the main violators — the so-called ‘Dirty 15’ countries — without listing them.

With so much still unknown regarding the implementation of the reciprocal tariff policy, it is difficult to determine its net impact on individual countries or the world. It raises the question of whether it will lead US trading partners to reduce their barriers before the policy comes into effect or retaliate when new tariffs are imposed after 2 April.

The former could be a net positive if Trump’s confessed love of tariffs does not lead him to find new reasons, or no real reason at all, to raise them anyway. If it is the latter, it would fuel a tit-for-tat trade war that could quickly escalate out of control. Rather than replace the unpredictable aspect of Trump’s trade policy, it may simply add a new mechanism for imposing tariffs. Experience suggests the ‘add’ rather than ‘replace’ option is much more likely — while some countries may reduce some barriers as an act of appeasement to avoid reciprocal increases, it appears that most may not. But until it is implemented, nothing is certain.

Source: East Asia Forum 

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