Among the highly debated topics in regards to the tariffs Trump has promised to impose are the reciprocal tariffs. What are they and how will they affect your business? Lets dive into it.
What is reciprocal Tariffs?
Reciprocal tariffs are tariffs on commodities from a specific country that has the same tariffs on the same commodity made in the USA. (its what is commonly referred to as “tit-for-tat”) and its intention is to retaliate (trade war) against that nation for imposing tariffs in the first place.
Reciprocal tariffs were most recently used in 2018 when the world responded to the 25% on steel and 10% on aluminum (raw material) that the US imposed on foreign steel and aluminum by imposing retaliatory tariffs on iconic US goods such as harley davidson motorcycles and peanut butter, ketchup, soybeans and Levi’s jeans among other things.
Currently, president Trump claims that many of US made products are being taxed at a greater tax of what the same product is being taxed when imported into the US.
Lets take for example the auto industry. EU charges 10% on U.S. cars, while the U.S. charges only 2.5% on EU cars. Another good example is India, they charge 100% on Harley-Davidsons motorcycles.
Why it seems fair on the surface.
On the surface this seems fair, if I ship a GM car to EU I should not be taxed at a greater rate of what I tax german Audi’s cars. right?
Furthermore, this means that if you are currently importing toys, games and general merchandise not are not part of the tit-for-tat wars you don’t have to worry.
But according to statements made by President Trump this cannot be farther from the truth.
President Trump will consider VAT and GST (value added tax and goods and services tax) as part of the tariff he threatens to retaliate stating that it makes our products less competitive in the markets where the importer has to pay sales tax.
The EU right now has a VAT of 20% and that applies when you import (to learn more about how GST/VAT are different than sales tax and how it applies to imports read my article here) so to Trump’s point, he will now impose 20% tariff on all EU made goods.
This seems very far fetched so I think that in order not to cause panic, lets take a step back. What is the definition of reciprocal? its a retaliatory, which means that there is something I want from that opposing nation to adjust, and once they do, I will remove my tariff. hence, the negotiations happening right now between the us and: EU, India, Canada, Australia and the UK.
How to prepare for it.
What does all of that translate to you, and how can you prepare for it.
Just a word, I feel like Trump intentionally left that topic very grey as opposed to the other tariffs (IEEPA and section 232, where he implied in advance of what to expect) and it might as well be a incentive to cause uncertainty within the importing community and might blend well into his strategy of bringing manufacturing back to the US. importers being uncertain is often causing more market and trade imbalance because of the fear of the unknown. People are afraid of whether they will have 60% on Chinese made goods, 50% on canadian steel and aluminum and so on and so forth. and that fear causes more disruption than the tariff itself. Like I have been speaking with many of you, tariffs are not easy to swallow but once we boil it down in dollars and cents it is oftentimes possible to absorb or include in a slight price hike. I firmly believe that the uncertainty is really what’s pushing some of you guys out of the industry or scramble for new methods and suppliers. (if I may, let the fear last for 5 minutes but then go back to work, you have a job to do and if you won’t do it then your competitor will. at least that’s what I do)
Additionally I think that its also a method to get the other nations to come to negotiation table for the same reason, the fear of the unknown.
Anyway, back to you.
When sourcing from new markets, it is helpful if you look at their sales tax to determine the risk exposure for the reciprocal tariffs, to my example earlier if you start sourcing from EU just keep in mind that there is a chance that you will have a 20% tariff as a direct result of their sales tax )VAT) policy of 20%.
Vietnam has 10% VAT same does Japan, and the list goes on (I use Zonos free tool to find out the tax rate for each country)
This should not be your entire unit of measure when considering moving production to a different country, like I said, chances are that the friendly nations will come to an agreement with the US.
Additionally one has to remember “when everyone else is losing their heads it is important to keep yours” and that has a tangible implication, which is: come April 2, and lets say there are 25% tariffs on Japanese made earphones and you have a shipment coming in, my advice would be do not clear customs until you really have to, chances are that within a short time (a day or two) a deal will be made and the tariffs eliminated and you will left with a bill to dispute.
My personal opinion on VAT and GST.
I am trying not to be political and am not planning on changing that but I figured I will share a finding that struck me.
The US (according to my research) is by the one and only nation worldwide (!!) that does not charge sales tax upfront upon importation. While we have our sales tax according to each state rates we do not ask for importers to pay the sales tax when clearing customs.
The significance of this is that instead of charging a tariff we could just charge a universal sales tax rate similar to what Canada does (they charge 5% GST and each province has their own rate if you trade in lets say Ontario you will be subject to 13% HST but at least you are not importing goods sales tax free.
Where does it differ? on the surface why does it matter whether I pay sales tax upon importing instead of when the goods are sold? the difference is relevant when importing for your own use or for your commercial use, if you sell it you will end up paying sales tax but if you keep it either for personal or commercial use you will end u paying zero in sales tax and I think at its core this is what trump considered unfair, not the fact that these nations have a different sales tax structure but that if I am buying for personal use from another nation I end up having to pay less as opposed to buying it locally just for the sales tax matter. and in order to fix this, instead of charging a “non refundable” non transferable” tariff, he should just impose a advance sales tax strategy that is refundable if its sold eventually and acts as a tariff if not sold.
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