[SINGAPORE] Sky-high reciprocal tariffs may converge on the baseline rate of 10 per cent after US talks with trading partners – though not for China, which will still face higher rates, said Citigroup’s global chief economist Nathan Sheets.
He expects global trade to settle into an equilibrium, with a “pretty clear idea” of this being possible in six to 12 months.
Yet, these higher rates will likely remain even after the next US president takes office, he warned in an interview with The Business Times.
A deal has already been struck with the UK, while forthcoming deals with Japan, South Korea, Saudi Arabia and Vietnam are highly likely, he noted.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Mexico and Canada should enjoy even lower rates due to the US-Mexico-Canada Agreement, with “the lion’s share of imports entering with tariffs at or near zero”.
But where talks fail, the average reciprocal tariff might be closer to 20 per cent.
If US President Donald Trump is unhappy with how talks go, he could impose punitive tariffs above the Apr 2 rates, warned Dr Sheets.
Higher tariffs for China, key sectors
Unlike other partners, where the US’ goal is negotiation, tariffs on China have “absolutely” been designed in part to restrain its economy – or at least its access to technology and key US products, he said.
“But even with China, it wouldn’t surprise me if over the next year or two, we did see some kind of a broader agreement negotiated.”
Meanwhile, upcoming sectoral tariffs are unlikely to be as low as 10 per cent.
For pharmaceuticals, the rate will likely be 25 per cent, in line with existing auto and steel and aluminium tariffs, Dr Sheets said.
But for electronics, a 10 to 15 per cent rate is possible.
“Electronics is a very globally integrated industry,” he said. “And as you start putting meaningful tariffs on inputs in the production process, you can disrupt and blow up supply chains, which can have a very kind of disruptive, challenging effect on the economy.”
Electronics firms have complained to the Trump administration about its tariffs on China, which could have led to initial carve-outs for this sector, he added.
Long-lasting
The rest of Trump’s term is unlikely to resemble the past few months – though there is no ruling out further duties, said Dr Sheets.
“You always have to be prepared that (Trump) thrives on unpredictability, or tactical ambiguity, and at any point we could get a social media post and we’ll say: ‘Oh my, I hadn’t seen that’.”
And even after Trump leaves office, the tariffs may remain.
After Trump’s first term, the Biden administration used Trump’s tariffs to maintain pressure on China, noted Dr Sheets. Reversing them would have been seen as “being easy on” the growing power.
Furthermore, Trump’s latest tariffs are expected to raise “several hundred billion dollars a year” in revenue.
So, if tariffs are “not doing demonstrable harm” – with US growth and inflation “performing well” – “it might be hard to roll them back too aggressively because of their implications for fiscal policy”, Dr Sheets said.
For now, the centrality of the US dollar and US markets has not been meaningfully threatened, he added.
The US remains a major market, even as trading partners have attempted to diversify, trade in local currencies and otherwise reduce their dependence on it.
If reserve managers move more swiftly away from the US dollar, or global investors’ appetites for US assets wane meaningfully, this could suggest a broader shift – but could also be cyclical.
“(Trump’s) got, essentially, 44 more months to go,” he said. “And we’ve got to wait and see.”
