Profitably breaking into foreign markets is hard to pull off – and for some executives, it is about to get harder. The new US Administration wants to rewrite the rules concerning import taxes. Gone are the days when a deal was a deal and executives could take the rules of the global economy for granted. President Trump’s plans for “reciprocal tariffs” will fall harder on some sectors and trading partners than others. Our goal here is to support executives as they assess their exposure to this latest bout of protectionist risk.
Because each country’s firms and sectors differ in competitiveness, in previous rounds of trade bargaining smart governments deployed their negotiating capital to selectively open up foreign markets. This created a situation where import taxes tended to get negotiated away in a nation’s more competitive sectors and retained elsewhere. In the past, what mattered in a trade deal was that each participating government reckoned they had enough potential export, investment, and job gains to overcome local opposition to opening up their economy. Back then, these trade deals were seen as fair because no government was forced to sign them and gains were concentrated in the sectors firms and officials cared about.
Cross-country differences in sectoral competitiveness inevitably meant that global trade deals involved differences across countries in the import taxes (tariffs) levied on the same good. For example, the European Union levies a 10% import tax on cars, and, for most vehicles, the US only charges 2.5%. The Americans would only have accepted this differential if they had received some other benefit – often in the form of lower tariffs on another good – from the EU. Essentially, trade-offs across sectors greased global trade deals. Unequal tariffs were a feature, not a bug, of post-war trade deals.
This type of hard-nosed, commercially valuable horse trading isn’t good enough for President Trump. At a press conference on 7 February with Japanese Prime Minister Shigeru Ishiba, the President proposed “reciprocal tariffs where a country pays so much or charges us so much and we do the same. So, very reciprocal because I think that’s the only fair way to do it. That way nobody’s hurt. They charge us, we charge them. It’s the same thing.”
In principle, implementing a reciprocal tariff plan means that the US charges a range of different import tariffs on the same good, linked to the tariff charged on the same good in a trading partner.
Taken literally, the President wants to redefine fairness in trade deals to mean that each country should charge the same import tax on each good as the United States – although he probably wouldn’t object to foreign governments imposing lower import taxes than the United States, thereby giving American firms an edge.
Eliminating import tariff differentials can be done in multiple ways. However, given his anti-import instincts, the expectation is that Trump wants to raise US import tariffs to levels charged by a foreign government. The alternative, of course, is for foreign officials to lower their import taxes to US levels – which would affect conditions of competition for firms in the liberalizing economy.
In principle, implementing a reciprocal tariff plan means that the US charges a range of different import tariffs on the same good, linked to the tariff charged on the same good in a trading partner. Let’s leave aside the nightmare of having to administer such a complex import tax system – with at least 5,000 product categories and around 200 trading partners, that could mean around a million different US tariff rates to be issued and enforced. What is at stake here for firms that sell a lot into the United States is that they may suddenly experience a jump in the import taxes they pay. These firms will either have to accept lower profit margins or find ways to pass on the higher import taxes to customers, some of whom may defect to other suppliers.
As is so often the case with Trump’s trade policies, both the details and the timing are unclear. On his way to Superbowl 2025, he told reporters he would announce his reciprocal tariff plan on 11 or 12 February 2025. That deadline has passed. His senior aide, Peter Navarro, told CNN on 11 February 2025 that the plan was still in the works, possibly weeks away.
Inevitably, this fuels suspicions that Trump has issued yet another threat that he won’t follow through on. But tell that to the Chinese, whose exporters now pay 10% more import taxes than a month ago. As David Bach, Richard Baldwin, and one of us wrote last month, the deliberate generation of policy uncertainty is a trait of President Trump’s governance style. Prudent risk management requires an assessment of exposure to the President’s potential reciprocal tariff plan even if, ultimately, it does not come to pass.
Your business playbook for a shifting political landscape
Trump’s reciprocal tariff plan applies to cross-border shipment of goods into the United States. Cross-border delivery of services is unaffected.
For ease of exposition, let’s focus here on those firms that are based outside the United States and want to sell to customers based in America. Similar considerations arise for American firms that seek to source goods from abroad. Five factors drive risk exposure. Some are country-specific, and the rest product-specific. Here is a checklist to work through.
First, Trump’s reciprocal tariff plan applies to cross-border shipment of goods into the United States. Cross-border delivery of services is unaffected. For some firms that sell goods, create an installed base in the United States, and service them, the service revenues won’t be affected by the US President’s new plans. The higher the share of services revenues, the lower the exposure to this reciprocal tariff plan.
Second, leveling up US tariffs to higher foreign levels requires that the latter be above zero in the first place. So, if a firm’s export operation is based in a nation that applies zero import tariffs on the goods that it exports, there isn’t any exposure. Some governments have signed trade deals, including regional trade agreements, where tariffs for certain products were abolished. In other cases, a government chooses independently not to charge import taxes. In these circumstances, Trump and his officials have no grounds for complaint, at least on import tariff grounds. The import tariffs charged by governments are published by the World Trade Organization, so firms can quickly check if they are in the clear.
Third, the firm has to be selling a product to the United States that US firms or their government want to export more of. Plenty of commodities and products fall below the radar screen in Washington, DC. President Trump tends to focus on iconic products such as vehicles and American crops.
Fifth, to be at risk, a firm must export a product line to the US from a nation that charges a much higher import tariff on that product.
Fourth, the economies of some of America’s trading partners may be too small to attract Washington, DC’s ire. Or they may be too geopolitically important to be picked on. In addition, the President likes to cut side deals – so even if his reciprocal tariff plan comes into force, its application may not be uniform. Foreign firms may also be able to secure exemptions – putting a premium on having the right legal and lobbying clout in Washington, DC. Indeed, obtaining an exemption could turn this situation into a competitive advantage for a well-connected firm.
Fifth, to be at risk, a firm must export a product line to the US from a nation that charges a much higher import tariff on that product. For example, if India charges an import tariff of 30% on widgets and the United States imposes an import tax of just 10%, then there is a 20% differential. Should the US raise its tariffs to 30% to match those of New Delhi, an Indian exporter of widgets would have to assess the hit to their volume sold, revenues, and margins. In turn, this begs the question: how often are import tariffs that unequal?
The table shows for several leading export destinations of the United States how often the foreign tariff is way above, roughly equal to, and way below the level charged by the Americans. This table makes for sober reading for exporters from Brazil, India, and Malaysia. Nearly 20% (19.2%) of the products that India could export have import tariffs into the United States that are 20% or more lower than those charged at home.
Put differently, only one-eighth of products made in India are protected with import taxes by New Delhi that are roughly the same or lower than that charged by US customs officials. Exporters from Brazil and Malaysia are less exposed to the risk of significantly higher US import tariffs if President Trump’s reciprocal tariff plan comes into effect.
Fewer firms that use the European Union, Japan, and the United Kingdom as export platforms to the United States are at risk of significantly higher import taxes. Even so, exposure must be assessed on a case-by-case basis by checking published import tax rates. After all, the table reveals that 3.6% of products made in the European Union enjoy the benefit of import taxes that are at least 10% higher than in the United States.
These findings do not support President Trump’s strident criticisms of EU, UK, and Japanese trade practices. In fact, if the President seeks to narrow actual import tariff differences, then his Administration is going to curtail significantly access to United States customers of exporters based in the larger emerging markets. The realization that unequal import tariffs do not provide a rationale for hitting the imports of the United States’ G7 and European allies may account for the delay in announcing this reciprocal tariff plan.
Export revenues earned in the United States contribute significantly to the top line of many international companies. During the presidential election campaign Trump advocated blanket across-the-board import tariff increases – to which, in principle, every foreign exporter was exposed. In contrast, President Trump’s reciprocal tariff plan will have a more granular impact, harming some foreign firms and possibly benefiting others. Assessing exposure to this trade threat requires a much more nuanced approach.
Unequal import taxes (tariffs) between the United States and leading export destinations
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