What Are Reciprocal Tariffs? Definition and Purpose

The United States has always used tariffs to influence trade in one way or another. While most importers are familiar with standard practices such as ad valorem calculations, reciprocal tariffs are not often discussed. While these are not a new concept, how they are applied has varied greatly in U.S. history. 

Key Takeaways: 

• Reciprocal tariffs are a trade tool used by governments to raise the import duty of a product from a foreign country to what that nation levies against it. 
• The goal of reciprocal tariffs is to promote balanced trade between nations by offering bilateral low tariff agreements or using high tariffs as a countermeasure against disproportionate rates. 
• The U.S. has a history of enacting reciprocal tariffs to push for balanced trade opportunities, starting with the Reciprocal Tariff Act of 1934 during the Great Depression. 
• President Trump’s Fair and Reciprocal Trade Plan is the latest proposal to use reciprocal tariffs and other measures to fight tariff imbalances. 
• While reciprocal tariffs can promote fair competition, they also carry risks, including retaliatory trade measures and supply chain disruptions.

We’re reviewing the basic definition of reciprocal tariffs, why they are used, and how the U.S. has implemented such procedures in the past. 

Defining Reciprocal Tariffs

A reciprocal tariff is when one country imposes an import duty that is intended to match or counteract what another country is applying to its exports.  

The reasoning in such a case is to promote balanced trade and ensure that one country doesn’t benefit more than the other by maintaining high import fees while expecting low fees from others. 

Typically, a reciprocal tariff is not meant to be used in retaliation against perceived unjust trade practices. In fact, in an ideal situation, both countries under a reciprocal tariff should be able to benefit. 

What is the Legal Basis for Reciprocal Tariffs?

The U.S. has used reciprocal tariffs in the past, starting in the 1930s. As the global economy evolved, so too have such trade policies. 

We’ll examine three instances of such tariffs as part of U.S. trade policy to show you why they started, how they were applied, and what effect (if any) they had. 

Reciprocal Tariff Act 1934

This act was applied by the presidential administration during the Great Depression. The goal at the time was to stimulate trade, and it did so by allowing the president to lower import tariffs by as much as 50% in exchange for similar reductions by others. 

This act stayed in place until 1962 and led to multiple bilateral trade agreements, setting the framework for future multilateral agreements, such as the World Trade Organization. It was replaced by the Trade Expansion Act. 

United States Reciprocal Trade Act 2019

A few decades later, another trade act was proposed that utilized reciprocal tariffs. The basic proposal of the U.S. Reciprocal Trade Act of 2019 (HR 764) was to allow the president to raise duties on countries that had raised their own tariff rates on American exports. 

Other key provisions of this act would have included the following:

• An enforcement mechanism should a country refuse to lower a tariff on U.S. exports
• A clause that required tariff adjustments to be terminated once tariffs or other trade barriers were lowered to match U.S. rates 

The key difference between this proposed act and the one that was passed in 1934 was the specific intent to use tariffs as a strong-arm technique. Such a proposal was a means of pushing other countries to lower tariffs by making their products less profitable for U.S. importers. 

Ultimately, this act did not pass on to become a law, as it never progressed in discussion beyond the subcommittee level. 

‘Fair and Reciprocal Plan’ Proposal 2025

The latest push to apply reciprocal tariffs comes as part of the ‘Fair and Reciprocal Plan’ presented as a Presidential Memorandum signed by President Donald Trump.  

As currently presented, it’s a two-pronged plan:

1. The initiation of tariff policy investigations in foreign nations. These investigations would be led by the Secretary of Commerce and the Office of the U.S. Trade Representative (USTR) with other agencies lending their expertise as needed. 

2. Once investigations are complete, the second half of the policy would be to take action against any trade imbalances found through the application of tariffs or other trade barriers to create a reciprocal or matching trade situation. 

Since it’s not being presented as an Act requiring congressional approval, the proposed actions within could go forth as executive orders on a faster timetable. We already have clear evidence of such a possibility based on the actions taken to apply additional tariffs to Mexico and Canada. 

Related: How Trump’s Tariff Policies May Impact International Trade: Canada, Mexico, China and More

How Reciprocal Tariffs Function in Practice

Based on what has historically been done, reciprocal tariffs imposed by the U.S. are used in the following situations:

• When a country imposes higher import duties on U.S. goods than the U.S. imposes on their goods.
• When non-tariff barriers, such as licensing restrictions or quotas, create unfair trade advantages.
• As a negotiation tool to encourage tariff reductions rather than outright trade restrictions.

Going back to the Fair and Reciprocal Plan currently proposed, there are a number of current trade situations that meet one of the situations I’ve just mentioned. 

On paper and just comparing tariff rates, the imbalance is obvious. However, in these international situations, there are likely to be a number of other factors involved. If there weren’t, then the reciprocal tariff calculation would be simple. 

Let’s use ethanol as an example. Currently, Brazil applies an 18% tariff rate on incoming U.S. products, while the U.S. only charges 2.5%. By applying a reciprocal tariff of 15.5% on Brazilian ethanol imports in addition to the standard rate, companies would now be paying 18% ad valorem total. 

In practice, this means that U.S. importers would now have to pay the same percentage value in duties to import ethanol from Brazil as Brazilians already pay when importing ethanol from the United States.  

Ideally, the end goal would be to have Brazil lower their duty rate to match the U.S. standard of 2.5% rate. 

Who is Affected by Reciprocal Tariffs?

The impact of such tariffs needs to be measured with short and long term effects in mind. Multiple groups are affected, but in different ways depending on whether the high tariffs end up being the norm or if countries on both sides agree to lower rates. 

Short-Term

The immediate impacts of such tariffs tend to leave most parties unhappy for a number of reasons. 

• Importers are likely to experience higher costs, thus increasing their expenses overall and reducing their profits
• Exporters are not likely to face any immediate changes to business, at least for as long as rates stay the same in the export destination. 
• Consumers buying foreign sourced products, whether directly or as the finished product of raw materials, are going to experience higher costs as importers and businesses try to recoup losses. 
• Domestic producers of the same product may benefit from increased interest, but may face difficulties if current output can’t meet demand. 

Long-Term

Predicting the long term impact is harder because we need to take into account how the nation facing reciprocal tariffs will respond and what the motives behind the initial increase were. 

Should the nation in question refuse to lower their own tariffs on American exports, tensions between both countries could keep rising. In such a case, you might see the following:

• Importers seeking better prices in alternate foreign markets to bypass the reciprocal tariff or continually raising their prices if the product doesn’t have an alternative source. 
• Exporters being closed off from a market due to escalating tensions
• Domestic producers being driven to ramp up their own production or even needing to shut down because production is dependent on a foreign raw material

It’s a mixed bag of positives, especially for importers of raw materials. As it stands, certain countries can dominate supply in an industry by simply making or having a material that few others do. 

If this describes your situation, it’s worthwhile to look into tariff exclusion policies such as those granted to certain products out of China that would otherwise be impacted by Section 301 tariffs. These can lower tariffs on qualifying products while you search for other sources or until domestic production catches up with demand at reasonable prices. 

Of course, there is always the possibility that the nation impacted by reciprocal tariffs will come to a new agreement with the U.S. and actually lower their rates on American exports. Ideally, it would result in more balanced and beneficial trade opportunities for both nations. 

Navigate Complex Tariff Situations With Help From USA Customs Clearance 

As the U.S. looks to implement policies aimed at reducing its current trade deficit, chances are your import business is going to be impacted sooner or later. 

Whether that results in your businesses needing to scale up or down, working with an experienced customs brokerage can help you navigate the changes. USA Customs Clearance offers a full suite of import services meant to ensure your shipments meet all requirements from destination to final entry. 

• Complete Custom Brokerage Services: including ISF Filing, Customs Bond applications and more.
• 1-on-1 Import Consulting Services: providing you dedicated time with a licensed customs broker.
• Manifest Confidentiality Filing: allowing you to secure your suppliers against competitors that could undermine your business.

Call us today at (855) 912-0406 to speak with a representative directly or send us your questions through our online contact form.