Liberation Day 2.0
WWDTD (What Would Donald Trump Do)?
On 9 July, or possibly sooner, Trump will decide whether to reapply his so-called reciprocal tariffs to countries currently ‘benefiting’ from a lower 10 per cent rate.
For those short of memory, a reminder:
On 2 April, Trump issued an executive order imposing a 10 per cent baseline tariff on all imports, supplemented by additional country-specific “reciprocal” tariff rates for those that run large trade surpluses (in goods) with the US. (Yes, actually just the result of a silly equation.)
For example, the US’s reciprocal tariff on the EU would be 20 per cent, Japan 24 per cent, Indonesia 32 per cent, India 26 per cent, etc. You can find the full list starting on page 20 of the relevant Federal Register notice.
The 10 per cent baseline tariff came into effect on 5 April. However, after briefly coming into effect in the morning, later in the day on 9 April, Trump paused the higher reciprocal duties for 90 days, ostensibly to allow countries to negotiate. (He also hit China with a higher tariff rate for retaliating, which has led to its own specific saga, but that’s a story for another newsletter.)
So here we are. Liberation Day 2.0 is fast approaching. What comes next?
I think there are three buckets a country could fall into
Deal. Countries in this bucket do a deal with the US to keep these particular tariffs as close to 10 per cent as possible. These deals might also address other US tariffs, such as the “national security” tariffs on cars, steel, and aluminium, but equally, they might not. So far, the only deal to address the reciprocal tariff rate **appears** to be the one the US just kinda did with China, which keeps the reciprocal tariff at 10 per cent (albeit then topping up with a 20 per cent fentanyl-related tariff, and a load of other legacy duties). [Note: the UK deal says nothing about the reciprocal rate because the UK is subject to the baseline 10 per cent regardless.]
Delay. Some countries might not quite get a deal, but they could get a reprieve. Another 90 days to work things out with Trump. And you know what … take it.
FAFO. Look, Trump might just decide to whack a few countries with the higher rate. Especially now that Trump knows everyone is calling him a “chicken”.
So that’s all rather obvious.
The really fun game is trying to guess which countries will fall into which bucket …
Given that Nobody Knows Anything (TM Alan Beattie), instead of thinking seriously about the merits of each country’s individual case, I have decided to focus on **how** folk in the US administration might do it.
The answer: ask the internet.
So in true WWDTD (What Would Donald Trump Do) fashion, I asked ChatGPT the following questions:
Which countries are worthy enough to deserve a deal ahead of Trump's 9 July tariff deadline? Which countries are negotiating in good faith and deserve more time? Which countries deserve to be whacked with higher tariffs?
And the internet came back with the following groupings …
Annnnnnd, sorry Indonesia, I guess?
[As an aside, contra The Internet, I think there’s a pretty decent chance the EU gets whacked with 20 per cent. At least for a bit.]
You-Es-EM-SEE-A
I recently discovered that a lot of Canadians read this newsletter.
So, to address that, there’s something I need to get off my chest.
Canadians, please, please, please … stop calling USMCA “CUSMA”.
Please.
Rules of origin
I’ve mentioned the UK’s deal with the US already. Apparently, it is going to be implemented soon.
Its headline benefit for the UK is a tariff-rate quota allowing 100,000 car exports a year to be subject to a US tariff of 10 per cent, rather than 25 per cent.
One of the yet-to-be-answered questions is how the US will determine whether the car export is from the UK or not. (Yes, I’m about to talk about rules of origin again.)
The most obvious approach is to apply the US’s non-preferential origin regime.
This means that cars from the UK would qualify so long as US customs determines that “the last country in which it has been substantially transformed into a new and different article of commerce with a name, character, and use distinct from that of the article or articles from which it was so transformed” is the UK.
This approach is pretty vibes-based, but you would assume that UK exporters of cars that the US thinks of as being from the UK will be able to benefit from the quota’s lower rate.
The alternative would be some sort of product-specific rule, of the type normally found in free trade agreements.
The problem with this approach is that the US’s normal criteria determining how much value must be created in an FTA partner’s market is WAY too restrictive for the UK.
For example, USMCA (again, never ever “CUSMA”) will eventually require 75% of the value of cars imported from Canada and Mexico to have been created in the region (plus a load of other stuff), while the UK successfully negotiated the equivalent figure down to 25% in its recent free trade agreement with Australia to account for how little auto value-add is created in the UK. (Thank you, pan-European supply chains.)
So … how would you bridge this gap?
One option would be to apply a value threshold to the rule. For example, vehicles valued at less than $100,000 could face a more restrictive rule (e.g. 75% RVC) than those valued at over $100,000 (e.g. 25% RVC). This would also align with the US’s focus on the deal being for “luxury” vehicles.
Given you all tell me you love my budget drawings, here it is in picture form:
But yeah … this approach could get messy quickly and lead to weird transfer pricing, so it's not necessarily ideal.
Best,
Sam
You-Es-EM-SEE-A? I think you mean "You-Smacka" (https://www.csis.org/podcasts/trade-guys/politics-you-smacka)
It *is* CUSMA. but I agree, was better to leave it as NAFTA.