Trump eyes $1 trillion from reciprocal tariffs, risks sowing uncertainty & widening trade conflict

US President Donald Trump has turned to tariffs yet again as a solution to purported decline of American economy.

Trump on Thursday signed an executive order to impose ‘reciprocal tariffs’. A senior White House official told Washington Examiner that he is looking forward to generating $1 trillion in revenue from these tariffs.

As he signed the order, Trump said that countries “charge us a tax or tariff and we charge them the exact same tax or tariff — very simple”.

“On trade, I have decided for purposes of fairness, that I will charge a reciprocal tariff — meaning whatever countries charge the United States of America, we will charge them no more, no less. In other words, they charge us a tax or tariff and we charge them the exact same tax or tariff. Very simple. In almost all cases they are charging us vastly more than we charge them, but those days are over,” said Trump at White House.

However, critics have said that it is an unrealistic target. They have further said that reciprocal tariffs could backfire as they may generate uncertainty about prices and widen the trade conflict if deals could not be reached before tariffs go into effect.

Here is how Trump’s reciprocal tariffs will work

Instead of blanket tariffs of 25 per cent that Trump imposed on steel and aluminium, the reciprocal tariffs will be decided on a country-by-country basis.

While that may appear to imply that the United States will retaliate with 10 per cent tariffs on Indian cars if India applies 10 per cent tariff on US cars, that is not the case. The calculation is going to be complicated as several other factors, including artificial devaluation of currency and non-tariff barriers, will also be factored in while calculating US tariffs.

CNBC’s Megan Cassella reported that taxes, particularly the value added tax (VAT); non-tariff measures, such as subsidies or regulation; exchange rates and devalued currency; and “any other policies the US Trade Representative (USTR) determines is an unfair limitation” will be factored in while calculating retaliatory tariffs.

There is no set timeline for these tariffs to come into effect and the process may take several months. The countries may use that time to strike deals with the Trump administration and lower tariffs to minimise trade conflict.

“We expect every country to take action because it’s patently obvious on its face that they are cheating us. Just look at the annual more than $1 trillion trade deficit that ships our assets off, as well as our factories and jobs, to foreign nations. So if we can balance our trade, that’s a trillion-dollar gain annually,” a senior White House official told Washington Examiner.

Separately, a source told Fox Business that Trump’s executive order tasked Commerce Secretary-designate Howard Lutnick and USTR to study all countries’ tariffs and complete their study by April 1.

Once they submit the study, Office of Management and Budget (OMB) Director Russ Vought would have 180 days to produce a report assessing any financial impacts, according to the source.

Are ‘reciprocal tariffs’ a double-edged sword?

Reciprocal tariffs punish countries that have wide trade surpluses with the United States on the back of what Trump considers unfair trade practices. The idea is that the threat of such tariffs would make these countries reduce tariffs on US products and strike trade deals to minimise the adverse effects on their economies.

However, critics have said that the idea as well as the expectation to generate $1 trillion in revenue are unrealistic.

Writing for Reason magazine, Eric Boehm noted that total US imports in 2024 were around $3.3 trillion. This would mean that tariffs to generate revenue of $1 trillion —around a third of all imports— would have to be very high. He noted that would be counter-productive as “achieving $1 trillion in new tariff revenue would require tariffs to be set so high that they would severely reduce imports — thus reducing the revenue from tariffs”.

In terms of the gross domestic product, $1 trillion revenue from tariffs would mean 3.4 per cent of the economy, makign Trump’s proposal “the largest tax increase since the Revenue Act of 1942”.

Trump’s reciprocal tariffs may also generate confusion as there would be multiple tariffs for same product. For example, steel from India may have tariff of 10 per cent but steel from China may have tariff of 25 per cent. That could mean that the pricing of the end-product could get complicated as input costs would not be constant.

“Trump’s idea of charging different tariffs on every country’s exports means the same product could be charged wildly different tax rates depending on where it was sourced. Those tariff rates would also be subject to constant fluctuation, as other countries shift their policies—as many will likely do in response to Trump’s new tariffs. That’s a recipe for not only higher taxes on American businesses that rely upon imports but also a constant state of uncertainty,” noted Boehm.