The United States has run persistent trade deficits for decades, despite models predicting that trade should balance itself over time. To address this issue, the concept of reciprocal tariffs is proposed. These tariffs are calculated to balance bilateral trade deficits between the US and its trading partners.
Tariff rates range from 0% to 99%, with unweighted averages of 20% and 41%. However, individual countries’ tariff rates can vary significantly, even when weighted by imports. The average reciprocal tariff across deficit countries is 50%, while the global average is 41%.
The failure of trade deficits to balance has many causes, including regulatory barriers, environmental reviews, differences in consumption tax rates, compliance hurdles, currency manipulation, and undervaluation. These factors deter American goods and keep trade balances distorted.
To calculate reciprocal tariffs, import and export data from the US Census Bureau for 2024 are used, along with elasticity values for import demand (set at 4) and tariff passthrough (0.25). The findings suggest that higher minimum rates might be necessary to limit heterogeneity in rates and reduce transshipment.
The study’s results indicate that the reciprocal tariffs range from 0% to 99%. The unweighted average across deficit countries is 50%, while the global average is 41%. Weighted by imports, the averages are 45% for deficit countries and 41% globally. Standard deviations range from 20.5 to 31.8 percentage points.
While there is some variation in estimates of elasticity values, the study provides a framework for understanding the relationship between tariff rates and trade balances. By calculating reciprocal tariffs that balance bilateral deficits, the US can address persistent trade imbalances with its trading partners.
Source: https://ustr.gov/issue-areas/reciprocal-tariff-calculations