Reciprocal tariffs: who should really be afraid?

The US is the largest economy in the world. It is also the country that buys more goods from abroad than anyone else ($3.17 trillion imports in 2023). While the former feature is most likely making the US president proud, the latter might have been bugging him for a while, especially as it is not matched by a correspondingly large figure on the selling side ($1.69 trillion exports in 2023). The mismatch between imports and exports, i.e. the trade deficit, is not to focus of this blog, however. Here we focus on the relevance of the US as an “importing power” and, while we work on some more sophisticated modelling (watch this space!), for now we provide some very simple figures on which trade partners should be most afraid of reciprocal tariffs applied across the board.

We have had plenty of tariff-related news coming from Washington these days: announcements, postponements, applications, revocations, etc. Some tariffs concern specific products (steel and aluminium, autos), specific countries (China, Canada, Mexico, the Dirty 15), or all countries in all products (reciprocal tariffs). However, while even just tracking these changes is challenging, they have certainly created more worries for some countries than for others. That is because, regardless of the pace at which new tariffs are announced, and the unprecedented uncertainty surrounding the process, if the US is not an important destination for your exports, you can afford to pay a bit less attention to all this.

So, who has been paying attention the most? With data from WITS, I computed the share of total exports directed to the US, and here below we report the 22 countries for which the US is the top export destination. If we expand the search to countries for which the US is the second or third top destination, we find 36 and 47 countries, respectively. These are large numbers but, being the US the number one importer of the world, this is perhaps expected.

Table 1: countries for which the US is the top export destination, and their second-best alternatives

*Canada and Mexico are not subject to reciprocal tariffs, and we report the tariffs announced on March 4th. Note that for Canada and Mexico good satisfying the USMCA rules of origin are exempt from the tariffs. **This is the Finger-Kreining index of export similarity: it ranges between 0 (totally dissimilar export structures) and 1 (identical export structures). For Mexico, the EU is the third-best destination, as the second-best was found to be the “Unspecified” category in WITS.

Inspection of Table 1 reveals a few additional aspects. Among the 22, other than the usual suspects (Canada, Mexico, a number of Central- and South-American countries), we find the EU, Japan and India. China is out of the table only because its exports to the US ($501.2 bn, or 14.83% of the total) are topped by its almost identical export to the EU ($501.7 bn, or 14.84% of the total). Taken together, the 6 largest exporters in the table make up 58% of total exports to the US; add China, and the share jumps to 76%. That is, the US is the top destination for the top world exporters.

Next, note how relevant the US is in each country’s total exports (column 1): the share ranges from 17.03% (Thailand) to 89.9% (Bermuda); the average is 40.5%, and the median 37%. Again, these are large figures denoting that, for countries depending on the US market, this dependence is high. For whoever is in Table 1, the reciprocal tariffs mean bigger trouble than for others.

So, what is the alternative for these countries if market access to the US worsens significantly? How easily can they re-direct some of their trade to other destinations? This will depend on a number of factors such as:

1. how large is the market of your second or third (or fifth) top destination after the US; the larger, the more capacity to absorb extra exports;
2. how diversified are your exports across destinations; the more diversified, the more options you have;
3. if these secondary markets also face worse access to the US; the worse their market access, the harder to re-direct your exports to them;
4. how similar their exports to the US are to yours; the more similar, the harder to re-direct your exports to them;
5. the readiness with which the secondary destinations will impose trade remedies to avoid being flooded by cheap products originally destined to the US.

Table 1 provides some insights. I list the second largest export destination for each country, the share of exports directed to it, a measure of similarity of exports to the US between each country and its second largest export destination, and the share of exports going to the top 5 export destinations (i.e. a measure of diversification).

For 12 of the 22, the EU is the second largest destination. This is good news as the EU is a large and stable market, and for many the EU already absorbs a large share of their exports (not for Mexico and Canada, or Bermuda!). On the negative side, the EU was hit by 20% reciprocal tariffs in the US, and will likely to be quick in imposing tariffs and quotas to prevent the deflection of products that had been destined to the US. The similarity scores with the EU are high for the large countries (bad news again), and low for the small countries. This is a bit of relief for the latter ones.

Specifically on the similarity figures, note that for countries that only face a 10% tariff in the US, a higher similarity with a “more-highly-tariffed second-best” (e.g. the EU) could result in an advantage  in supplying the US market. Examples of this could be the Dominican Republic and Bermuda, which have the highest similarities with the EU among the 10%-countries, and a 10 percentage points tariff margin over the EU when exporting to the US.

Another aspect worth singling out is that, in general, exports are very concentrated among a handful of destinations (column 7). The share of the top-5 exceeds 70% in the 14 out of 22 cases (in only 3 cases it’s less than 60%). This is not great news for whoever will try to re-direct goods so far made for the US.

What's the position of the UK?

The UK does not appear in Table 1 as the US is not the UK’s top export destination. The UK’s top export destination, by far, is the EU. Nonetheless, the US matters to the UK as its second most important market. Table 2 summarizes the UK’s position vis-à-vis both the US and the EU.

Table 2: UK’s trade with the US, and with top destination

Without going through every figure, what I say above about countries having the EU as their second-best (or top, in this case) market applies to the UK. On the plus side, the EU already receives the majority of UK’s exports; on the minus side, the EU will be struggling itself with the reciprocal tariffs, and is unlikely to be able help the UK out in absorbing goods meant for the US, also due to the UK and the EU’s exports to the US being extremely similar.

Export similarity with the EU is not all negative for the UK, however: the twice higher reciprocal tariff that Trump slapped on the block is going to give UK exporters a significant advantage over their European competitors, if they decide to keep serving the US.