Reciprocal tariffs: some simulations

We simulate the possible effects of the US Reciprocal Tariffs using a modern trade model accounting for global supply chain linkages. The US will suffer the most, potentially losing $1,900 per capita yearly. In case countries retaliate, the losses could increase to $2,300. Canada and Mexico are the second most affected countries. As the UK faces lower tariffs than other countries, its losses are modest, ranging from -0.1% to -0.3% of GDP. If it eventually manages to negotiate an exemption while everybody else does not, it could even make small gains.

On Wednesday, the US President Donald Trump announced an unprecedent series of tariffs on virtually all countries from which the US imports goods. The tariffs, which are implemented on national security grounds, might mean the end of the world trade order as we know it, and signals the end of the US’s support for that multilateral trading system.

The so-called ‘Reciprocal Tariffs’ are country specific and depend on the trade deficit that the US runs with that country, as illustrated by the USTR. Much has already been written about the flimsy basis underpinning these tariffs (see for instance this UKTPO publication), and we do not discuss this further here, as the aim is to focus on the possible impacts.

The general rule is that all imports into the US will pay an additional 10% duty starting from April 5th. For some countries, the additional duties will be increased starting from April 9th.

These additional duties are applied on top of all other existing measures. This means that, if a product has a Most Favoured Nation (MFN)1 tariff of 5%, the additional 10% tariff bring the tariff rate to 15%.

As the UK does not run a trade surplus in goods with the US (the core criterion used to calculate the Reciprocal Tariff), it will only face an additional 10% tariff when exporting to the US, to be paid by the importing firms.

China will be hit particularly hard. The new additional rate for China is among the highest, at 34%, and it comes on top of the 20% extra duties applied at the beginning of March. This means that, starting next week, imports from China will be taxed 54% on top of what is already there – e.g., MFN tariffs, antidumping duties, other taxes.

Canada and Mexico were spared from the new round of tariffs, as they were already targeted by additional tariffs earlier this year. On the same grounds, the Reciprocal Tariffs do not apply to the already targeted metal and automotive products.

There are also other exceptions: for copper, pharmaceutical, semiconductors, wood products, critical minerals and energy products. These are not negligible: for instance, we calculate these products to be worth about 21% of total US imports from the UK.

In our modelling, we consider part of the Reciprocal Tariff package, also the additional duties introduced by the US earlier this year on China, Canada and Mexico, steel and aluminium, and automotive – for details, see the methodological note. We model four different scenarios:

• Scenario 1: the US implements the reciprocal tariffs on all partners
• Scenario 2: same as 1, but the UK is exempted
• Scenario 3: same as 1, plus all countries retaliate charging US imports half the Reciprocal tariff charged by the US on their exports2
• Scenario 4: same as 3, but only the EU, Canada and China retaliate

Scenario 1 shows what could happen if the US applies its Reciprocal Tariffs and other countries do not respond. Scenario 2 models a possible exemption of the UK from the tariffs – what would happen if Starmer’s negotiations are successful.

In Scenario 3 every country retaliates. While Canada and China already partly retaliated, the new tariffs might spur more retaliation. While lacking information on how countries might respond, we believe that, at least initially, it is unlikely that countries will retaliate across the board, or at the level of the US. Therefore, we simply assume that all countries retaliate with half the rate charged by the US on them. For instance, as the additional tariff on the EU is 20%, the EU retaliates with a +10%.

In the last scenario, we assume that only the EU, Canada and China retaliate. These countries have been the most vocal about a muscular response to the US and, due to the large share of US exports directed to them, are those that can do more harm to US firms. We therefore look at a scenario where these three countries retaliate while all others do not.

To understand the impact of the tariffs in simple terms, the modelling focuses on changes in real GDP. The changes in real GDP arise from changes in production and trade as a result of the changes in tariffs across 30 goods and services sectors and for 13 countries (plus a Rest of the World aggregate) covering all global trade and production – see the methodological note for modelling details.

The results suggest that the United States shoots itself in the foot loosing between -2.8% and -3.4% across the four scenarios – see Figure 1. This translates into annual losses of $660-800 billion, or $1,900-2,300 per capita. This is not very far from our earlier estimates.

The other most affected countries are its closest trading partners, Canada and Mexico. For Canada, the losses are between -1.9% and -2.4%, the largest occurring when every country retaliates. For Mexico the losses are slightly smaller, around -1%.

The fourth country in the ranking is Switzerland, losing 0.7-1.1% of real GDP. Switzerland rather than China at the fourth place? It might be surprising at first sight, but we note that a large portion of Swiss sales are destined to the US. Moreover, Switzerland is targeted with a +32%.

Figure 1 also shows the share of a country’s goods sales going to the US – including domestic sales. We can see an almost perfect correlation between the rank of real GDP losses and the rank of US sales share. That is, the more dependent you are on the US, the more the tariffs will hit you.

Figure 1: Changes in real GDP and share of sales to the US