Health Warning

Sectoral tariffs and the tariff-industrial complex

Much of the recent trade focus has been on Trump’s new Liberation Day 2.0 “reciprocal” tariff threats.

Threatening the EU with a 30% tariff (up from 20%) on August 1, after officials on both sides had spent the week telling the press that a deal was imminent, was a particular highlight. (Although 50% on Brazil because its courts are being mean to former President Bolsonaro is probably more egregious.)

But, the thing is, for many countries, these “reciprocal” tariffs aren’t the main issue.

For the EU, and many others, the bigger news last week was Trump’s threat to hit pharmaceutical imports with a 200% tariff after "a year, year and a half". These would run alongside newly announced 50% tariff on copper and the existing Section 232 50% tariff on steel and aluminium, as well as a 25% tariff on cars and car parts. Possible additional tariffs include those on lumber, trucks, semiconductors, aerospace and probably other items I’ve forgotten.

Let’s assume that US tariffs on the EU end up looking something like this (2024 figures; variety of sources¹):

• Automobiles and parts ($202bn): 25% tariff

• Steel and aluminium ($147.3bn): 50% tariff

• Copper ($30bn): 50% tariff

• Pharmaceuticals ($127bn): 200% tariff

• Other exports ($82.7bn): 30% tariff

In such a scenario, the EU’s trade-weighted tariff would be … 70%. (!!!)

But perhaps this is too pessimistic. Let’s assume there is a deal.

Let’s assume that, as per the UK deal, 100,000 EU vehicles, or around 13% of the 789,197 vehicles exported to the US in 2024, are subject to a 10% tariff. The rest still get 25%.

Let’s assume that the steel and aluminium tariff is pulled back down to 25% for EU-originating steel and aluminium. Same for copper.

Let’s assume that EU-originating pharmaceuticals are subject to a lower 25% rate. However, let’s also make an educated guess that the US determines origin based on where a medicine’s active pharmaceutical ingredient (API) originates. According to ECIPE, China (23%) and India (3%) supply around 26% of the EU’s API. So we’ll assume 26% of the exports are non-EU originating and subject to the higher 200% rate.

Let’s assume that aerospace tariffs are 0% [more on this in the segment below].

Let’s assume that spirits and wines are 0%, because I’m feeling nice.

And let’s assume that everything else is 10%.

In such a deal scenario, you end up with a trade-weighted tariff of … 22.5%.

Which, y’know, still isn’t great.

And even if you fiddle with some of these assumptions to make them slightly more liberal … the outcome remains not great.

So yeah, this is why you’ll regularly find me on the internet saying something like this:

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Clearing First Base

Everyone, including me, is assuming that for the most part, Trump is not going to go below the 10% baseline for his “reciprocal” tariffs.

However, in an action that has otherwise gone largely unremarked upon, this is exactly what he did in respect of aerospace products in the UK deal.

See the following extract from the US Federal Register implementing text:

A ray of hope … of sorts.

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The Tariff-Industrial Complex

If I were a conspiracy theorist, I would suspect that people like me, Alan Beattie, Dmitry Grozoubinski, and others are deliberately s**t stirring on trade to generate gainful employment for ourselves. More tariffs = more money and attention. For us.

On that note, listen to the aforementioned members of our trade cabal discuss Trump’s tactics on The FT’s Economic Show podcast HERE.

Dmitry also wrote about the same topic HERE.

[Let the records show that when MFN was first getting going, I asked Dmitry if he wanted to partner up on this. Unfortunately, it didn’t happen, but think just how much better this newsletter would be if he had said YES. Very much your loss. I can’t afford Alan.]

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Best,

Sam

1. Yeah … ChatGPT. I can do it properly if someone pays me.