Background to the Reciprocal Plan on Trade
On February 13, the U.S. administration introduced its Fair and Reciprocal Plan on Trade, outlining its approach to reciprocal tariffs. The policy aims to address what the administration perceives as an unfair trade imbalance, where the U.S. maintains relatively low import tariffs while other countries impose higher tariffs on U.S. exports. According to the administration, this lack of reciprocity is unjust and “contributes to [the U.S.] large and persistent annual trade deficit“.
This rationale was challenged during the first Trump administration by economists (example), who pointed out that bilateral trade deficits are not primarily caused by trade barriers. Instead, they result from structural factors, global supply chain dynamics, and the way trade is measured. Economic data suggests that countries with lower tariffs do not necessarily experience larger trade deficits.
A Notice from the United States Trade Representative (USTR) indicates that reciprocal tariffs will primarily target countries with the largest trade deficits with the U.S., which are also some of its biggest trading partners, including the United Kingdom and the European Union. In response, the EU has pushed back against the policy, emphasizing that while the U.S. runs a trade deficit in goods, it enjoys a significant trade surplus in services with the EU, effectively balancing the overall trade relationship.
U.S. Treasury Secretary Bessent indicated last week that the administration’s primary focus – at least for the most significant reciprocal tariffs – is on the so-called “Dirty 15”: the 15 countries with persistent trade imbalances with the United States. In 2024, the U.S. recorded its largest trade deficits with Cambodia, Canada, China, the EU, India, Indonesia, Japan, Malaysia, Mexico, South Africa, South Korea, Switzerland, Taiwan, Thailand, and Vietnam. Notably, the UK is not on this list, suggesting that it may avoid major tariffs on the announced “Liberation Day” next week.
Reciprocal Tariffs and their Feasibility
At this stage, it remains unclear what the reciprocal tariffs set to be announced on April 2 will entail. Much will depend on how the U.S. defines reciprocity and the data it chooses to use.
The most likely scenario is that for each country with a trade deficit in goods, the U.S. administration will analyze differences in average tariff rates and impose country-specific tariffs to offset those disparities. Alternatively, the administration may adopt a more targeted approach, implementing sector-specific measures or reliefs, particularly for industries such as automotive and pharmaceuticals. A hybrid model, combining both country-level and sector-specific measures, appears the most probable outcome. That this is the most likely scenario also seems confirmed yesterday with the announcement of 25% automotive tariffs on passenger vehicles, light trucks, and spare parts, with no country exempted.
A key question is how the U.S. will account for other measures it views as trade barriers for U.S. companies. These include Digital Services Taxes (DST) and Value-Added Tax (VAT), which are quantifiable, as well as broader regulatory issues, such as online content moderation rules in the UK, which are under scrutiny by the White House. Notably, some of these concerns – such as the DST – are reportedly already part of ongoing UK-U.S. trade negotiations. This confirms that the U.S. announced tariffs are in part negotiation tactics rather than the implementation of long-term, enforceable measures.
VAT, a non-discriminatory consumption tax applied to all goods regardless of origin, has attracted significant attention. If VAT were to be factored into reciprocal tariffs, the impact would be substantial – given the UK VAT rate of 20%. It is of course true that VAT is not a tariff and should theoretically be neutral for businesses. In practice, however, compliance obligations in some countries are perceived as very burdensome and sometimes difficult to meet – particularly for non-established companies with occasional imports that need to move quick. As a result, some businesses ultimately treat VAT as a cost of doing business rather than a recoverable expense.
Impact of Reciprocal Tariffs on the United Kingdom
The imposition of U.S. tariffs on UK-originating goods would significantly increase their cost in the U.S. market. This may impact demand. Businesses on both sides of the Atlantic will adjust their strategies accordingly. We recently explored the importance of origin in the context of tariffs. Businesses will likely reassess their customs processes and optimize their supply chains, considering factors such as supplier relationships, manufacturing locations, and key customer markets. Whether the tariffs will genuinely result in reshoring – the intended revival of U.S. domestic production – remains highly uncertain.