Trump's reciprocal tariffs to further escalate global trade war

US President Donald Trump in his address to the joint session of Congress in early March this year said that the imposition of "reciprocal tariffs" would go ahead after the delivery of a report on the April 2. Trump tariffs are reshaping US trade policy to enable the US to gain an advantage by redefining international trade. In fact, he is breaking apart all the relationships on which the post-WWII order was based.

His reciprocal tariffs will feature rates on a country-by-country basis corresponding to tariffs and non-tariff barriers US products face. The reciprocal tariff rate will account for the actual tariff rate and domestic policies of other countries that hinder US exports.The extent of tariff coverage is uncertain due to various technical and political factors.

However, an executive order issued around the middle of February spelled out the extent of its operation. The order directs the administration to identify reciprocal tariffs for any country that adversely impact the US. The US administration will address any regulations it deems unfair. The planned measures extend beyond tariffs and encompass responses to actions such as the value-added tax and regulations that impact US companies in the EU.

Last week, Trump stated that other countries have taken advantage of the US and predicted that his April 2 tariffs would generate substantial revenue, helping to keep tax rates low or even lower them. While the largest US trade partners with surpluses are in focus, countries with a trade deficit with the US like Australia are also targeted. However, Trump also indicated that while the retaliatory regime will be broad-based, it could be more targeted, and exemption may be given.

Trump stated that the April 2 tariffs will be a "Liberation Day" for the US economy. Trump imposed a 25 per cent tariff on countries buying oil or gas from Venezuela while trading with the US, causing oil prices to rise. This is focused on China, a major buyer of Venezuelan oil. This additional tariff will be on top of 20 percent tariff levied on Chinese exports to the US.

At the initial stage it appears the April 2 tariffs are directed at a group of 15 countries which have a persistent trade surplus with the US. US treasury secretary Scott Bessent branded them as the "dirty 15" in a television interview last week. These 15 countries account for 88 per cent of total trade with the US.

US Commerce Secretary Howard Lutnick told reporters that the administration would announce its plan to establish a new department to oversee tariff collection called the External Revenue Service to "build the power and prestige of America back".  However, this new department's precise role remains unclear because tariff revenues are collected by the Customs and Border Protection department.

Trump claims tariffs will enhance US manufacturing, safeguard jobs, increase tax revenue, and stimulate domestic economic growth. He also wants to restore America's trade balance with its trading partners, reducing the gap that exists between US imports from and exports with individual countries.

These tariffs aim to reduce a US$1.2 trillion trade deficit by raising US tariffs to match those of other countries and counter their non-tariff barriers. He also said that countries could still avoid tariffs if they lower their own tariff rates or move manufacturing to the US. A White House official did not specify when sector-specific tariffs on automobiles, pharmaceuticals, and semiconductor chips would be implemented, stating that these remained to be determined and would be at the president's discretion.

It now appears that Trump is standing firm on reciprocal tariffs than on sector specific tariffs. As a trade analyst suggests that framing tariff hikes as a corrective measure to abusive practices by US trading partners seems much easier to justify than sectoral tariffs with only nebulous connections to their proposed justification. Therefore, reciprocal tariffs will garner more public support that sector specific tariffs.

But Trump appears has made his decision on sectoral tariffs. On March 25, President Trump issued an executive order imposing a 25 per cent tariff on import of all cars designated to have been made overseas. The tariff will go into effect on April 2, the same day his reciprocal tariff agenda will be made public.Global carmakers warned of immediate price hikes and dealers raised fears of job losses in big auto-exporting countries, many of which are U.S. allies.

Trump also warned at a press conference in the Oval Office as he announced his car tariff that tariffs on lumber were also being prepared, and that reciprocal tariffs would cover all countries, not just 'dirty 15" countries as touted by Treasury Secretary Scott Bessent.

These planned tariff measures have several components. They include taxes on US goods and increased costs to US firms from non-tariff barriers, such as regulatory barriers and  subsidies including social services such as the Australian Pharmaceutical Benefit Scheme (PBS). Even the value-added tax may be viewed as an unjust levy on US goods. Additionally, policies that alter the exchange rate against market rates, harming the US, will also constitute unfair trade.

Trump's tariff offensive since his assumption of office in January has been marked by threats, reversals and delays and his trade team appears to be trying to formulate policy on the fly. To date, the administration has implemented a 25 per cent tariff on steel and aluminium, a 20 per cent duty on imports of goods from China, and a 25 per cent tariff on imports from Canada and Mexico.

These initial actions reflect the ongoing trade tensions resulting from President Trump's trade policies, which have generated economic uncertainty and may adversely impact the global economy. The lessons countries around the world draw will help determine the impact on the global economy as further tariff escalations occur with the unveiling of the Reciprocal Tariffs plan on April 2.

Tariffs have been a central part of Trump's overall economic vision, and the reciprocal tariff initiative represents an expansion of his tariff-based trade policy. The policy is expected to serve as a central pillar of Trump's trade agenda, embodying his "America First" ideology. The idea is that Trump's tariff strategy will reposition the US in the global economy in a way that will be far more favourable to the country.

Trump's trade war not only threatens every economy in the world but also the US itself. Trump has not ruled out a recession due to his trade policies. US Commerce Secretary Howard Lutnick also weighed in and said the tariffs were "worth it" even if they led to an economic downturn. In early March the Federal Reserve Bank of Atlanta forecast a GDP contraction of 1.5 per cent in the first quarter this year, but a later estimate jacked up that rate to 2.8 per cent. This forecast depicts a worsening economic outlook for the US.  

The US Department of Commerce reports that Canada, China, and Mexico were the top three trading partners last year, accounting for 41 per cent of the total value of imports into the United States.Economists and businesses worry that a trade war with these three countries could disrupt the supply of essential goods, making them more expensive.

The likelihood of an economic downturn in the US economy is causing turmoil in the bond market. Yields (interest rates) on the 10-year government bonds have been falling, and further falls are expected as the Federal Reserve will feel the need to cut rates as the US economy moves towards a recession. Threat to Canadian and Mexican economies is a very real one. More than 80 per cent of both countries' exports go to the US. It is estimated that Canada could face a contraction of up to 5 per cent of GDP and Mexico 3 per cent.

The reciprocal tariffs have created tensions in the global economy, raising the spectre of an escalating trade war. Many major economies around world like China, Canada, the EU have already announced counter measures, while many other countries are contemplating. In late February the Financial Times commented that the latest salvo in trade policy increases "the danger of a wider trade war that risks inflicting significant damage on the global economy".

Escalating global tariff barriers will lead to a full-scale international trade war. Also, Trump tariffs are a sure sign of the global economic breakdown. But ultimately Trump's trade policy as articulated in his Tariff measures reflects a paradigm shift in redefining international trade with an aim to position the US as the principal architect of a new global trade regime.

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