So finally, we know what reciprocity means. No, it is not what the Cambridge Dictionary says it means—‘a situation in which two groups agree to help each other by behaving in the same way or by giving each other similar advantages’. Since we are talking about America and reciprocal tariffs, let us check what Merriam-Webster, ‘America’s most trusted dictionary,’ says reciprocity means—‘the quality or state of being reciprocal: mutual dependence, action, or influence; a mutual exchange of privileges; specifically, a recognition by one of two countries or institutions of the validity of licences or privileges granted by the other’.The Office of the United States Trade Representative (USTR) has put out a note explaining reciprocity and reciprocal tariff calculations. It says that ‘reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the US and each of our trading partners. This calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing.’
The USTR note further explains, ‘to conceptualise reciprocal tariffs, the tariff rates that would drive bilateral trade deficits to zero were computed. While models of international trade generally assume that trade will balance itself over time, the United States has run persistent current account deficits for five decades, indicating that the core premise of most trade models is incorrect.
The failure of trade deficits to balance has many causes, with tariff and non-tariff economic fundamentals as major contributors. Regulatory barriers to American products, environmental reviews, differences in consumption tax rates, compliance hurdles and costs, currency manipulation, and undervaluation all serve to deter American goods and keep trade balances distorted. As a result, US consumer demand has been siphoned out of the US economy into the global economy, leading to the closure of more than 90,000 American factories since 1997, and a decline in our manufacturing workforce of more than 6.6 million jobs, more than a third from its peak.’While individually computing the trade deficit effects of tens of thousands of tariff, regulatory, tax, and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff level consistent with driving bilateral trade deficits to zero. If trade deficits are persistent because of tariff and non-tariff policies and fundamentals, then the tariff rate consistent with offsetting these policies and fundamentals is reciprocal and fair.’Having given themselves a definition of reciprocity that suited their stated aim of imposing tariffs, a mathematical calculation followed. Findings were arrived at that concluded that the unweighted average reciprocal tariff across ‘deficit’ countries is 50% and the unweighted average across the entire globe is 20%. When weighted by imports, the average across deficit countries was said to be 45%, while the average across the entire globe was calculated at 41%.
The very long titled (‘Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits’) April 2, 2025 executive order declared a national emergency. (Incidentally, this is the sixth national emergency declared by President Trump since he took charge on January 20, this year.)The National Emergency was declared to address the ‘large and persistent annual US goods trade deficits’ which had reached $1.2 trillion in 2024. The President, in his speech at the Rose Garden, defined reciprocal tariffs as ‘they do it to us and we do it to them—very simple, cannot be simpler than that’—a definition a little different from what the USTR itself has defined reciprocity to mean.The executive order goes on to explain at length that ‘asymmetries in trade relationships’ have also arisen because of non-tariff barriers by trade partners. This explains the country-specific ad valorem rates of duty spelt out in Annexure 1 of the executive order—57 countries, including the European Union. The list of countries subjected to such tariffs, all of whom the US has a trade deficit with, makes for interesting reading.Chad (trade deficit of $20.9 million), Cameroon (trade deficit of $55.7 million), Zimbabwe (trade deficit of $10.8 million), and so on. The adjusted reciprocal tariff arrived at ranges from 11% (Congo) to 44% (South Korea) and 50% (Lesotho).India has been slapped with a 27% tariff. (Though the President, in his speech, kept mentioning the tariff as 26%.) It is obvious that a lot of weight has been given to non-tariff barriers for the tariffs imposed; for instance, in the case of India, the tariffs are much more than the weighted average of tariffs imposed by India on US imports. The irony is that the non-tariff barriers in the US are substantial—this is why the cost of manufacture and production is high, which is the reason why there has been a ‘hollowing’ of manufacturing from the US.This then is how reciprocity of tariffs has been arrived at—and we speculated over several reams of paper if reciprocity meant item-specific, sector-specific, and so on! Time will tell how the US consumer and economy will react to these. As regards how India should handle this development, that will require a separate piece.— The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views expressed are personal.Read his previous articles here
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