The views in this article are sourced from China International Capital Corporation (CICC)
<h3>Specifics of Reciprocal Tariffs</h3>
On April 2nd at 4 PM US time, Trump announced the policy related to reciprocal tariffs and signed a presidential executive order. Under the framework of reciprocal tariffs, a comprehensive &#34;blanket&#34; tariff and a &#34;case-by-case&#34; country-specific tariff are applied. According to the White House's statement:
<ul>
<li>The United States will impose a basic 10% comprehensive tariff on all imported goods. This is consistent with the 10% blanket tariff promised during his previous presidential campaign. Industries that have already implemented a 25% tariff rate, such as steel, aluminum, and automobiles, are not affected by this order. Additionally, copper, pharmaceuticals, semiconductors, timber, certain key metals, and energy products are also excluded from the reciprocal tariff framework. These industries were mentioned by Trump as categories for potentially higher tariffs, but specific implementation timelines and rates have not yet been announced.</li>
<li>Certain countries and regions will face higher rates. The presidential executive order has not yet published specific appendix details on the White House website, but based on Trump's statements, economies with higher reciprocal tariff rates include the European Union (20%), Japan (24%), South Korea (25%), China (34%), Taiwan (32%), India (26%), and Thailand (36%). Furthermore, another Fact Sheet released by the White House states that Trump has signed an executive order to end the tariff exemption policy for small packages under $800 starting May 2nd, imposing a 30% tariff or a $25 tariff per item (which will increase to $50 per item after June 1st).</li>
</ul>
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Overall, the countries and regions facing higher tariffs align with what US Treasury Secretary Janet Yellen previously stated, that the Trump administration is focusing reciprocal tariffs on economies where the US continues to experience trade imbalances. This is also consistent with our earlier assessment in &#34;Outlook on Trump's 'Reciprocal Tariffs',&#34; indicating that countries and regions with both surpluses and higher tariff rates are more likely to be targeted by reciprocal tariffs. However, the actual implemented rates may even exceed our previous extreme scenario assumptions.
<ul>
<li>Mexico and Canada continue to enjoy exemptions under the previous USMCA framework and are not impacted by additional reciprocal tariffs. The presidential executive order states that tariffs previously imposed on illegal immigration and fentanyl will remain in effect, but exemptions are extended, meaning that all Canadian or Mexican goods meeting USMCA agreement conditions will continue to enjoy preferential access to the US market. However, Canadian or Mexican goods that do not meet USMCA requirements will currently incur an additional 25% ad valorem tariff (10% for Canadian energy).</li>
<li>In terms of implementation timeline, according to the presidential executive order, all goods entering US customs territory will incur an additional 10% ad valorem tariff starting April 5, 2025, while goods from trade partners facing higher reciprocal tariffs will have new tariff rates implemented starting April 9.
Our calculations show that if the above tariffs are fully implemented, the effective tariff rate in the United States will rise significantly by 22.7 percentage points from 2.4% in 2024 to 25.1%. This level exceeds the extreme scenario we outlined in our outlook report &#34;Trump's 'Reciprocal Tariffs' Outlook&#34; and will surpass the tariff levels in the U.S. after the implementation of the Smoot-Hawley Tariff Act in 1930.</li>
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<h3>Reciprocal Tariffs Increase Uncertainty</h3>
We believe that reciprocal tariffs not only fail to alleviate uncertainty but will further exacerbate concerns. First, the scope and magnitude of reciprocal tariffs are broad and significant, which will have a major impact on the U.S. and even the global economy. How will countries respond after the implementation of tariffs? Will they choose retaliation or endure? If retaliatory measures are taken, it could lead to an escalation of the tariff war, creating more downward pressure on the global economy, a risk that deserves attention.
Second, will there be more tariffs after reciprocal tariffs? Trump previously indicated plans to impose tariffs on semiconductors, medical products, timber, copper, and other goods, so when will these measures take effect? Additionally, reciprocal tariffs do not include Mexico and Canada, which currently enjoy tariff exemptions for goods that comply with the United States-Mexico-Canada Agreement (USMCA). There is also uncertainty regarding how future policies will change.
Third, how long will reciprocal tariffs last? Is it possible to reduce them through negotiations in the future? If negotiations occur, when can they begin? In the long term, Trump hopes to promote the return of manufacturing through increased tariffs and intends to use the revenue from tariffs to offset the fiscal deficit caused by tax cuts. If Trump insists on achieving these goals, does that mean tariffs will not be temporary but will have a certain degree of permanence? These questions also remain unanswered.
<h3>Impact on the U.S. Economy</h3>
If the above tariffs persist, the U.S. economy will face a more severe risk of &#34;stagflation.&#34;
First, economic growth will be difficult to avoid declining. From a micro perspective, after the imposition of tariffs, businesses face two choices: to raise prices or not to raise prices. If they choose to raise prices, consumers will bear higher costs, demand will slow down, and economic downward pressure will increase. If they choose not to raise prices, their own profits will be squeezed, leading to reduced demand for employment, ultimately resulting in economic slowdown.
From a macro perspective, tariffs are essentially a way for the government to increase tax revenue, with businesses and consumers bearing the costs, which is equivalent to fiscal tightening. Trump's imposition of tariffs will lead to a transfer of money from the private sector back to the government sector, reducing net assets in the private sector and suppressing investment and consumer spending. Within the private sector, who ultimately bears the cost of tariffs depends on the bargaining power between producers in other countries and regions and U.S. consumers, as well as changes in exchange rates of those countries and regions relative to the U.S. dollar. Of course, this tariff revenue may eventually be returned to U.S. businesses and consumers in the form of tax cuts, but at least in the short term, it will have a negative impact on overall demand
Secondly, tariffs will push up price levels and increase upward pressure on inflation in the short term. Although weak demand will eventually suppress inflation, consumers may first experience a wave of price increases. According to a survey by the University of Michigan, U.S. consumers' inflation expectations for the next year surged to 5% in March, the highest since 2022, while expectations for inflation over the next 5-10 years rose to 4.1%, the highest since 1993. The implementation of reciprocal tariffs will exacerbate the short-term pressure on price increases, thereby increasing the risk of inflation expectations becoming self-fulfilling.
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Our calculations show that, in addition to previous tariffs, the addition of reciprocal tariffs could raise U.S. PCE inflation by 1.9 percentage points, increase U.S. fiscal revenue by $737.4 billion, and reduce U.S. real GDP growth by 1.3 percentage points (Chart 4). Our above estimates do not take into account exchange rate changes. If the dollar appreciates, the impact on the U.S. will weaken. Conversely, negative impacts will intensify. In addition, we assume that U.S. consumers and overseas producers share the tariff burden equally, meaning that half of the cost increase is passed on to U.S. consumers, while the other half is borne by trade partners, and we assume that the tax multiplier in the U.S. is about 1 within a year. If U.S. consumers have weak bargaining power, the negative impact on the economy will be even greater.
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<h3>Implications for Monetary Policy</h3>
In the face of &#34;stagflation&#34; risks, the Federal Reserve can only choose to wait and see, and it may be difficult to cut interest rates in the short term. According to our calculations above, reciprocal tariffs may pose significant inflation risks, coupled with the current rise in consumer inflation expectations, which will force the Federal Reserve to refocus its policy on &#34;inflation prevention.&#34; We believe that after the implementation of reciprocal tariffs, the Federal Reserve will need at least two months to assess their actual impact on inflation. Therefore, unless the U.S. economic situation is extremely weak, it will be difficult for the Federal Reserve to make a decision to cut interest rates in the first half of the year. The difficulty in cutting interest rates means the absence of a &#34;Federal Reserve put option,&#34; which will further increase the downside risks to the U.S. economy and increase downward adjustment pressure in the market

On April 2nd, Trump announced "reciprocal tariffs," which exceeded market expectations and may increase uncertainty and market concerns, as well as exacerbate the risk of "stagflation" in the U.S. economy

- On April 2, 2025, President Trump announced reciprocal tariffs, imposing a 10% tariff on all imports, effective April 5, 2025.  
- The tariffs will significantly impact trade partners, with higher rates for countries like the EU (20%) and China (34%), while exempting Mexico and Canada under the USMCA.  
- These measures could lead to increased inflation and economic stagnation in the U.S., complicating the Federal Reserve's monetary policy as it faces rising inflation expectations.

CICC: Trump's "reciprocal tariffs" impact exceeds expectations