Tariffs: reciprocal or not?

President Trump’s reciprocal tariffs have been announced.

“The way the rate is constructed, the larger a trade surplus a country has with the US the larger the tariff.”

The Tax Foundation estimates the effective tariff rate on US merchandise imports is likely to climb to 16.5 per cent, the highest since the Smoot-Hawley tariffs of the 1930s.

Those tariffs were implemented to protect American industries during the Great Depression but ultimately deepened the economic crisis.

Trump’s reciprocal tariffs place a minimum 10 per cent baseline tariff on 160 countries.

These across-the-board levies on all merchandise imports, took effect on 5 April.

The 10 per cent tariff is the alleged minimum cost barrier (tariff plus non-tariff) that US exporters face from other countries.

Some countries face higher tariffs as soon as 9 April. Not surprisingly, countries that run substantial surpluses with the US will face higher levies, such as 24 per cent on Japan, 20 per cent on the European Union and 34 per cent on China.

When is a reciprocal tariff not reciprocal?

Although Trump claimed the reciprocal tariffs are based on an accumulation of the costs imposed by tariff and non-tariff barriers facing US exporters in a foreign country, it is not.

The reciprocity tariff is based on a simple formula which is published by the US Trade Representative.

The amount of any reciprocal tariff is the maximum of 10 per cent or one-half that country’s trade surplus with the US divided by their exports.

The way the rate is constructed, the larger a trade surplus a country has with the US the larger the tariff.

Notably two tiny remote Antarctic outposts, Heard Island and McDonald Island, populated by penguins and seals, are among the places targeted by the administration's new tariffs.

Economic impact

According to the Tax Foundation (TF), the reciprocal tariffs will raise USD$1.5 trillion in revenue over the next decade and shrink US GDP by 0.4ppt.

Previously announced tariffs this year will raise USD$1.3 trillion in revenue over the next decade and shrink US GDP by 0.3ppt.

In sum, Trump’s tariffs will raise nearly USD$2.9trn in revenue over the next decade and reduce US GDP by 0.7ppt, which rises to 0.8ppt if retaliation is incorporated.

On a conventional basis, before incorporating the negative effects of tariffs on the US economy, the TF estimates the tariffs would increase US federal tax revenue by nearly USD$2.9 trillion over the next decade, with the reciprocal tariffs accounting for about half.

On a dynamic basis the tariffs would raise USD$2.3 trillion over the next decade. All major investment categories of assets decreased, notably portfolio investment and direct investment assets.

Yale’s Budgetlab estimates US real GDP growth will be -0.5ppt lower in 2025 from the 2 April announcement and -0.9ppt lower from all 2025 tariffs.

In the long run, the US economy will be persistently -0.4 and -0.6% smaller respectively, the equivalent of USD$100 billion and USD$180 billion (in 2024 USD terms).

The 2 April announcement raises USD$1.4 trillion over 2026-35 conventionally scored, and USD$366 billion less if dynamic revenue effects are taken into account.

All tariffs to date in 2025 raise USD$3.1 trillion, including the effect of retaliation to date, with USD$582 billion in negative dynamic revenue effects.

What now for US rates?

Despite the higher-than-expected tariffs, Federal Reserve Chair Jerome Powell was still patient when speaking at an event the day after the tariffs were revealed.

Powell indicated that Trump’s tariff increases on 2 April risk igniting inflation and slowing growth more than the Fed had estimated.

He also said the tariffs could lead to a persistent rise in prices, not just a one-off hit as he has previously argued.

Powell estimated the risks of that outcome, which would include higher unemployment, as “elevated”. He said higher inflation from tariffs is likely to show up in coming quarters.

Powell also seemed to back away from previous comments that tariffs are likely to have just a one-off impact on the price level.

He said tariffs would generate at least a temporary rise in inflation, but it is also possible that the effects could be more persistent. He added that it was the Fed’s responsibility to ensure that a one-time increase in the price level does not become an ongoing inflation problem.

To do so he said would require long-term inflation expectations to stay well anchored.

Powell said it is too soon to say what the appropriate path for monetary policy is. He added that given the economy was in a good position and that the central bank was in no rush to adjust policy, the Fed had taken a step back to watch how the administration’s policies turn out and how they affect the economy before taking action.

Tom Kenny is Senior Economist, ANZ, and Shwetha Sunil Kumar is an Economist, ANZ

This is a version of work originally published on ANZ Research on April 7, 2025. Subscribers can access the research here.