Trump's Reciprocal Tariffs, vol. II: Will Trump's reciprocal tariffs maths affect the EU's response?

4. 4. 2025
7 min. reading
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
Trump's Reciprocal Tariffs, vol. II: Will Trump's reciprocal tariffs maths affect the EU's response? ilustrační foto
Trump's reciprocal tariffs do not actually reflect some sum of tariff and non-tariff barriers by trading partners on US exports associated with exchange rate manipulation and "unfair" VAT, but actually distribute a higher 20% tariff on US imports depending on the size of the US deficit in trade in goods, according to the structure of US foreign trade turnover. I also discuss the obvious macroeconomic reasons that push the US administration to address the foreign trade deficit.
The structure of the reciprocal tariff calculation encourages not only reciprocity on the part of U.S. trading partners, but also negotiation. If we apply the calculation of these reciprocal tariffs between EU countries by way of illustration, we can understand the potential frictions in the formation of a consensual response by the European Union.
For the impact of the tariffs on the Czech economy, see the previous commentary: Trump's reciprocal tariffs: 20% on Czech, EU exports and 25% tariffs on cars, iron and aluminium. We conclude with a chart highlighting the role of the US economy in the value-added exports of Central European countries. In the Czech Republic, it was about 2.3% of Czech GDP in 2020 and about 4% in manufacturing. However, Central European exports to the US have increased and the role of US final demand may account for over 2.5% of Czech GDP.

Rationale for reciprocal tariffs: Distribution of the US deficit depending on the extent of imports to the US
If President Trump had introduced the concept of reciprocal tariffs a day earlier, their rationale (tariffs, non-tariff barriers, exchange rate manipulation, VAT) might have sounded like a hilarious April Fool's joke. However, its calculation is based on a simple principle: the level of tariffs reflects the ratio of the US trade deficit to imports from each country. In other words, it divides the U.S. trade deficit among individual importers and penalizes with higher import tariffs importers who have a larger foreign trade surplus relative to their exports to the U.S.

Chart 1: Calculation of reciprocal US tariffs
Trump's 50% rebate and tariff differential as a bargaining chip.
The Trump administration applies "reciprocity" with a 50% discount - the larger the US deficit with a given country, the higher the tariff, but always at half the theoretical maximum. This approach builds on the idea that U.S. trading partners will be incentivized to buy more U.S. goods to reduce their deficits - and thus their tariffs.

Four comments on this:
  1. Of course, this is what the negotiating tactic was built on late last year.
  2. Even more so, the calculation misses trade in services, which the EU buys heavily from the US. However, here I believe that the price elasticity of demand is lower and the supply elasticity less elastic than in the case of goods. This would mean that the imposition of tariffs/taxes on imports of services from the US is more likely to be borne by the consumer than by the service provider's margin.
  3. In addition, the lower limit of 10% on reciprocal tariffs must be especially challenging for countries with deficits in foreign trade with the US.
  4. US trading partners will be affected differently by different levels of reciprocal tariffs. This may lead to a redistribution of foreign trade flows depending on how individual countries can cope with tariff increases (China +34% vs. EU +20%) on individual products.
This approach lacks the logic of seeking a comparative advantage in foreign trade. Thus, I export more competitive products with more value added (now IT services in the US) and import goods that I can produce but would see less value in. That in itself does not say that the US should not address the imbalance in foreign trade, hence the current account.
Why is the US now addressing deficits?
But you don't have to be a macroeconomist not to recognise the source of the imbalance: US fiscal policy. Its deficits represent negative government savings. In 2024, the U.S. will probably be around -7.4% of GDP. The U.S. current account deficit represents negative savings in the economy as the sum of savings by the government, households and businesses in the U.S. Current account deficit in the US in 2024 around -3.8% of GDP.
That is why the US administration is significantly addressing government spending that funds activities outside the US, which in truth any government (if it could) facing twin fiscal and external deficits would do to avoid having to reach directly into the wallets of its constituents. To illustrate, the Czech government finances will reach a deficit of 2.2% of GDP in 2024, while in the US it is calculated to be around 7.5%. 1% of Czech GDP is approximately CZK 80 billion. Thus, while the Czech government "has to deal with" a deficit of around CZK 180 billion, the US government, by way of illustration, is dealing with the equivalent of a deficit of around CZK 600 billion. Imagine what an election in the Czech Republic would look like if you were in such a fiscal environment.

What does that mean for the EU?
All EU countries will face a 20% reciprocal tariff. However, if we apply this "reciprocal" math to EU countries, we see two groups:

1️) A group of countries with a trade surplus vis-à-vis the US in the range of 1-3% of GDP that would face higher than 20% tariffs if they were not part of the EU. This group accounts for 55% of EU GDP, and two-thirds of this is accounted for by Germany and Italy, and one-third by smaller states like the Czech Republic, Austria or Slovakia.
2) Countries with trade deficits or small surpluses - France, Spain, Poland, the Netherlands or Belgium and Denmark.

Chart 2: Implied reciprocal tariffs for selected EU countries
Moreover, Denmark is a specific case because it has reduced its surplus with the US since the first Trump administration.
Figure 3: Changes in the calculation of these implied tariffs compared to the Trump administration's first
What will be the EU's response?
It will be interesting to see how the EU's response evolves, particularly whether the attitude of key players will be influenced by the different level of these "implied reciprocal tariffs". That is, whether there will be future friction between a group of countries with a larger surplus (55% of EU GDP) with a group with a smaller surplus or even deficit (45% of EU GDP) that would otherwise theoretically face the threat of half of Trump's reciprocal tariffs. This friction is unlikely to be part of the initial response (see President Macron's response)
A non-negligible question is also whether this tariff shock should prompt Europe to make even more structural changes.

Chart 4: Distribution of the EU's economic weight by trade balance with the US
Chart 5: The role of the US economy in Central European value-added exports. In the Czech Republic, this would be about 2.3% of Czech GDP in 2020 and about 4% in manufacturing. However, Central European exports to the US have increased and the role of US final demand may account for over 2.5% of Czech GDP.