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The Fiscal, Economic, and Distributional Effects of Illustrative “Reciprocal” US Tariffs [1]

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Date: 2025-02

Many of these criteria are subjective and hard to anticipate. Currency policies and trade practices are often difficult to quantity and assess in a modeling setting. However, tariff schedules and VAT rates by country are well-documented. The Budget Lab (TBL) therefore modeled an illustrative “reciprocal” tariff proposal that adheres to the spirit of the February 13 announcement and incorporates just the tariff- and VAT-matching criteria. One can therefore interpret TBL’s exercise as a lower-bound estimate of the Administration’s “reciprocal” tariff principles when broadly applied.

The scenario TBL modeled made several key assumptions about the “reciprocal” tariffs:

The tariffs go into effect April 2. In the retaliation scenario, retaliation is near-immediate. For any product, if a foreign country’s levied tariff on US imports is greater than the US tariff on that country’s imports, the “reciprocal” US tariff rises by the difference. If a foreign country has a value-added tax (VAT) or consumption tax, the “reciprocal” tariff further rises by the appropriate country VAT rate, depending on the product in question. For simplicity, TBL reduced the VAT schedule in each country to four rates: a base rate and (potential) reduced rates on energy, groceries, and tourism. The tariffs apply to both traded goods and services. Typically, TBL assumes US tariff proposals only apply to goods imports, but VATs generally apply to both goods and services so taken at face value, TBL assumed a VAT match must apply to services as well (for services within each country’s VAT base). Services made up only a fifth of total US imports in 2024, so the choice does not dramatically change the qualitative interpretation of the results.

TBL modeled two variations: one without any retaliation from other countries, and one with tit-for-tat retaliation by the full new tariff amount.1 TBL followed broadly the same methodology as its prior tariff analyses; the methodology is briefly summarized in the appendix.

The map below shows the resulting change in the weighted average US tariff rate by country resulting from the tariff- and VAT-matching approach mentioned earlier. Some countries see only a small adjustment: notably, the average tariff on Canada only rises 5 percentage points, one of the smaller effects worldwide. China’s tariff rises by 13 percentage points, not substantially different than the 10% tariff the Administration has already levied on China. Mexico and India’s tariffs hike by 16 and 17 percentage points, respectively. The effect is the largest in Europe, driven by the Continent’s generally-high VATs. The UK and Russia go up by 20 percentage points, Denmark and Sweden by 25, and Hungary by 27.

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[1] Url: https://budgetlab.yale.edu/research/fiscal-economic-and-distributional-effects-illustrative-reciprocal-us-tariffs

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