Quick take on reciprocal tariffs

In the latest evolution of US tariff policy, Trump just announced that he will impose reciprocal tariffs on countries that charge tariffs on the US. He also suggested that VAT (Value Added Tax) taxes charged by countries will be treated similarly to tariffs.

The US was on holiday yesterday and Asia isn’t very good at parsing complex news like this, so markets haven’t moved very much. Traders also have the perception that reciprocal tariffs are not so bad because each country can negotiate its way out of them. However, most countries can’t just drop their VAT tax as it is a major source of tax revenue, so if VAT tax draws reciprocal tariffs, then a lot of trading partners will be in trouble.

I attempted to figure out the implications of reciprocal tariffs with the help of Perplexity AI’s Deep Research function. I asked it to analyse the tariff structures, VAT, and subsidies of America’s major trading partners, and this is what it came up with:

Tariff and VAT Analysis by Country

China

Tariff Structure

• MFN Rates: Average 2.31% (2021), with higher rates in protected sectors:

  • Automotive: 15–25%.

  • Chemicals: 6.5–10%.

• Preferential Rates: Reduced duties for critical industries (e.g., 0% for semiconductors under provisional rates)7.

• Tariff Rate Quotas: Higher out-of-quota rates for agricultural goods (e.g., 65% for sugar).

VAT System

• Standard rate: 13% (9% for utilities and agriculture).

Subsidies

• Government support for steel, solar, and EVs, estimated at 10–20% of production costs.

Reciprocal Tariff Calculation

• Base Rate: 2.31% (average tariff) + 13% (VAT) = 15.31%.

• Sector-Specific Adjustments:

  • Steel: 25% (MFN) + 13% (VAT) + 15% (subsidies) = 53%.

  • Automotive: 15% + 13% = 28%.

European Union

Tariff Structure

• CET Average: 3.5%, with peaks in:

  • Automobiles: 10%8.

  • Agriculture: 12–25%.

• Anti-Dumping Duties: Additional tariffs on steel (e.g., 25% on Chinese steel)14.

VAT System

• Standard rates range from 17% (Luxembourg) to 27% (Hungary).

• Weighted EU average: 21% (using Germany’s 19% and France’s 20% as proxies).

Subsidies

• Agricultural subsidies under the Common Agricultural Policy (CAP): €55B/year, or ~7% of farm revenues.

Reciprocal Tariff Calculation

• Base Rate: 3.5% (CET) + 21% (VAT) = 24.5%.

• Sector-Specific Adjustments:

  • Automobiles: 10% + 21% = 31%.

  • Agriculture: 12% + 21% + 7% (subsidies) = 40%.

Mexico

Tariff Structure

• MFN Average: 3.39%, with recent hikes to 5–50% on 544 goods (e.g., 35% on textiles, 50% on steel).

• USMCA Exemptions: Many goods duty-free, but non-compliant sectors face higher rates.

VAT System

• Standard rate: 16%.

Subsidies

• Industrial support for automotive and aerospace: 5–10%.

Reciprocal Tariff Calculation

• Base Rate: 3.39% + 16% = 19.39%.

• Sector-Specific Adjustments:

  • Textiles: 35% + 16% = 51%.

  • Steel: 50% + 16% + 10% (subsidies) = 76% (capped at 50% under the decree).

Canada

Tariff Structure

• MFN Average: 1.72%, but retaliatory tariffs of 25% on $30B in U.S. goods (e.g., steel, aluminum).

• USMCA Exemptions: Most goods duty-free.

VAT/GST System

• Federal GST: 5%, with provincial sales taxes up to 10% (e.g., 15% in Nova Scotia)3.

Subsidies

• Dairy and poultry supply management: Equivalent to 150–250% tariffs via quotas12.

Reciprocal Tariff Calculation

• Base Rate: 1.72% + 5% = 6.72%.

• Sector-Specific Adjustments:

  • Dairy: 250% (quota equivalent) + 5% = 255%.

  • Retaliatory tariffs: 25% (pre-existing).

Non-Monetary Barriers and Subsidy Equivalents

Regulatory Barriers

• EU: Food safety standards block U.S. hormone-treated beef and chlorine-washed poultry.

• China: Cybersecurity reviews and localization requirements for tech imports.

Subsidy Valuation

• China: EV subsidies reduce export prices by 15–20%.

• EU: CAP direct payments account for 20% of farm income.

Methodology for Non-Monetary Tariff Equivalents

• Cost of Compliance: EU regulations add 10–15% to U.S. agricultural export costs.

• Market Access Restrictions: China’s tech barriers equate to 20–30% tariffs.

Case Studies in Key Sectors

Automobiles

• EU Export to U.S.: 10% tariff + 21% VAT = 31% reciprocal tariff.

• U.S. Export to EU: 2.5% tariff + 21% VAT = 23.5% effective rate.

• Trump’s Proposal: Matches the 31% rate unless the EU reduces its tariff.

Steel and Aluminum

• China Export to U.S.: 25% tariff + 13% VAT + 15% subsidies = 53%.

• U.S. Export to China: 2.31% tariff + 13% VAT = 15.31%.

• Trump’s 2025 Steel Tariff: 25% global rate, escalating to 53% for China.

Agriculture

• EU Dairy Export to U.S.: 12% tariff + 21% VAT + 7% subsidies = 40%.

• U.S. Beef Export to EU: 0% tariff + 21% VAT + 15% regulatory cost = 36%.

Based on the above findings, Perplexity suggested the following reciprocal tariffs:

To operationalize Trump’s reciprocal tariff policy, the U.S. would need to impose the following baseline tariffs:

• China: 15.31% (general), 25–53% (targeted sectors).

• EU: 24.5% (general), 31–40% (automobiles, agriculture).

• Mexico: 19.39% (general), 51–76% (textiles, steel).

• Canada: 6.72% (general), 25–255% (retaliatory sectors).

Perplexity also identified India, Brazil, and Indonesia as countries with high tariffs and/or VAT that may attract high reciprocal tariffs.

India

While not explicitly mentioned in the search results, India is a large economy known for high tariffs:

• Average Tariff Rate: One of the highest among major economies

• GST (similar to VAT): Ranges from 5% to 28% depending on the goods or services

Brazil

Another large economy with a complex tax structure:

• Average Tariff Rate: Relatively high compared to developed economies

• VAT-like Taxes: Multiple layers of consumption taxes (ICMS, IPI, PIS, COFINS) that can add up to high effective rates

Indonesia

Indonesia is implementing a VAT increase that could attract attention:

• VAT Rate: Set to increase to 12% on January 1, 2025

I want to caveat that Perplexity is capable of hallucinations or relying on incorrect or outdated sources. For example, I probed it more on Mexico’s tariffs and found that a lot of the tariffs that Mexico imposes are not applied to US goods due to the USMCA trade agreement.

My guess is that Trump’s administration is making reciprocal tariff calculations right now, and at some point in the next few months, will announce the size and scope of reciprocal tariffs, at which point the market will freak out again. Markets have not reacted yet today, so there is an opportunity to put on some trades here. If you’re a paying subscriber, keep reading to see how I’m trading this.