DoubleLine's Take on the Reciprocal Tariffs

by Bill Campbell of DoubleLine, 4/9/25

On April 2, 2025, President Donald Trump announced reciprocal tariffs on all countries across the globe. The tariffs start with a baseline of 10%, meaning that is the lowest rate that any country can achieve under the new reciprocal tariff structure. In addition to the baseline, higher reciprocal tariffs have been charged on most countries. The administration for the time being has allowed a few carveouts for sectors such as pharmaceuticals and semiconductors, but overall, these tariffs have surprised market participants to the high side of what was expected, with the global average rate in the range of 18.3% to 23% depending on how sectoral exemptions are handled.

Risks to the Tariff Outlook

The intention of these tariffs has not been clearly articulated. Are they to be tools to bring manufacturing back to the U.S., increase U.S. exports, achieve other objectives or a combination of goals? Estimates of revenues from the reciprocal tariffs are in the range of $600 billion to $650 billion. So, are reciprocal tariffs to be understood primarily as a new revenue source for the government? Or are they primarily to serve as leverage to renegotiate bilateral trading deals with countries around the globe? These questions give rise to uncertainty around how long these tariffs will be in place. The longer they stand, the greater the risk to the global economy.

Few nations have been sitting idle in the face of these tariffs, and many have come out with retaliatory measures. In addition to what was outlined in my February paper, “Assessing Trump Trade Policy: A Year of Rolling Tariffs, Macro Unknowns and FX Volatility,” retaliatory measures have included:

  • Canada on April 3 introduced 25% tariffs on U.S. vehicles and components deemed by Ottawa to be non-compliant with the Canada-United States-Mexico Agreement (CUSMA) while earmarking all tariff revenue to support Canadian auto workers. This targets politically sensitive U.S. industries in Republican-leaning states, mirroring strategies used in prior trade disputes.
  • Beijing has mimicked the 34% U.S. reciprocal tariffs, imposing the same markup on American goods entering China. In addition, Beijing restricted exports of seven rare earth elements critical for advanced technologies, including samarium (used in aerospace/defense), gadolinium (MRI components), and terbium (electronics).
  • The European Union (EU) has proposed a two-phase retaliatory strategy against U.S. tariffs, targeting $28 billion in American imports, with measures designed to pressure politically sensitive industries.

The response of the White House to these retaliatory measures remains to be seen. In his first term, President Trump reacted to China’s retaliatory tariffs by piling on more tariffs. When China imposed tariffs on U.S. products such as soybeans and agricultural products in 2018, the president doubled down on tariff threats, directing the U.S. trade representative to consider $100 billion in additional duties. The first Trump administration also pursued a tit-for-tat strategy, escalating tariffs on $34 billion worth of Chinese goods in July 2018 and later proposing 10% duties on $200 billion in additional goods. If President Trump were to take a similar approach today, such actions would worsen the outlook for global growth.

One potential bright spot, albeit likely temporary, is the carveout for certain sectors from the reciprocal tariffs, mainly pharmaceuticals, semiconductors, lumber and energy. Although this might appear to be a positive development, I think it’s likely that the White House will implement specific tariffs targeting these sectors later this year. This raises additional risks to the economic outlook as such sectoral tariffs would likely be additive to the reciprocal tariffs already announced.